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What Is A Funded Debt?
What Is A Funded Debt?
Funded debt is also called long-term debt since the term exceeds 12 months. It is
different from equity financing, where companies sell stock to investors to
raise capital.
KEY TAKEAWAYS
Funded debt is a company's debt that matures in more than one year or
one business cycle.
Funded debt is also called long-term debt and is made up of long-term,
fixed-maturity types of borrowings.
Examples of funded debt include bonds with maturity dates of more than a
year, convertible bonds, long-term notes payables, and debentures.
Understanding Funded Debts
When a company takes out a loan, it does so either by issuing debt in the open
market or by securing financing with a lending institution. Loans are taken out by
a company to finance its long-term capital projects, such as the addition of a new
product line or the expansion of operations. Funded debt refers to any financial
obligation that extends beyond a 12-month period, or beyond the current
business year or operating cycle. It is the technical term applied to the portion of
a company's long-term debt that is made up of long-term, fixed-maturity types of
borrowings.
Funded debt means it is usually accompanied by interest payments which serve
as interest income to lenders.
Because it is a long-term debt facility, funded debt is generally a safe way of
raising capital for the borrower. That's because the interest rate the company
gets can be locked in for a longer period of time.
Examples of funded debt include bonds with maturity dates of more than a
year, convertible bonds, long-term notes payables, and debentures. Funded debt
is sometimes calculated as long-term liabilities minus shareholders’ equity.
Another ratio that incorporates funded debt is the funded debt to net working
capital ratio. Analysts use this ratio to determine whether or not long-term debts
are in proper proportion to capital. A ratio of less than one is ideal. In other
words, long term debts should not exceed the net working capital. However, what
is considered an ideal funded debt to net working capital ratio may vary across
industries.
There are several advantages to using debt over equity financing. When a
company sells corporate bonds or other facilities through debt financing, it allows
the company to retain full ownership. There are no shareholders who can claim
an equity stake in the company. The interest companies pay on their debt
financing is generally tax-deductible, which can lower the tax burden.