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Debt capital refers to borrowed money that a business uses to fund its operations or growth. This can come in the form of loans from banks, bonds issued to investors, or other types of debt instruments. The business agrees to repay the principal amount along with interest over a specified period.
The advantage of using debt capital is that it allows businesses to finance their operations or growth without diluting ownership, unlike equity capital where ownership shares are sold. However, the cost of debt capital is the interest that must be paid, and there is the risk of default if the business fails to make its debt payments. Prudent management of debt capital is crucial to maintaining a healthy financial position.
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