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The financing decision

Debt finance

7.1 What is debt finance?

Debt finance is the loan of funds to a business without conferring
ownership rights.

Key features:

 Interest is paid out of pre-tax profits as an expense of the business.

 Paying interest reduces the taxable profits of the business and hence the
tax payable.

 Debt finance carries a risk of default if interest and principal payments are
not met.

 To reduce the risk to the lender, security and/or covenants are used.

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