Legal Definitions - debt capital

Debt capital refers to funds that an organization, such as a company or government, raises by borrowing money. This money must be repaid to the lenders, typically with interest, over a specified period. It is a form of financing where the lenders do not gain ownership (equity) in the organization but instead become creditors.

Here are some examples illustrating debt capital:

• Example 1: Small Business Expansion Loan

  A local coffee shop wants to expand its operations by purchasing a larger space and new espresso machines. To finance this growth, the owner applies for and receives a business loan from a commercial bank. The money the coffee shop receives from the bank is debt capital. The shop is obligated to repay the principal amount of the loan plus interest to the bank over several years, making the bank a creditor rather than an owner of the business.

• Example 2: Corporate Bond Issuance

  A major pharmaceutical company plans to invest billions in developing a new drug. Instead of using its existing cash reserves or issuing new shares, it decides to issue corporate bonds to institutional investors and the public. The funds raised by selling these bonds represent debt capital. Each bond is essentially a loan from the investor to the company, which promises to pay back the principal amount at a future date and make regular interest payments until then. The bondholders are creditors, not shareholders, of the company.

• Example 3: Municipal Infrastructure Project

  A state government needs to finance the construction of a new highway system to improve transportation. To secure the necessary funds, the state issues municipal bonds to individual and institutional investors. The money the state obtains from the sale of these municipal bonds is debt capital. The state is borrowing from investors and is legally bound to repay the bondholders with interest, typically using future tax revenues or other public funds, without giving investors any ownership stake in the state's assets or operations.