Funded Debt: Everything You Need To Know

What is Funded Debt?

As the borrowing firm, you pay for a loan with interest payments to the lender over the term of the loan. You report this as debt that was funded—hence, funded debt.

Understanding Funded Debt

Funded debt usually pays for a long-term project. It usually comes with interest, which is the income for the lender. As the borrower, this is a conservative method of raising capital for your company because generally the interest rate is locked.

Funded Debt Examples

• Bonds that mature after one year, one business cycle or longer
• Convertible bonds
• Debentures
• Long-term notes payables

Your funded debt is included in leverage ratio calculations, also known as capitalization ratios.

Monitor your funded debt with this free Monthly Balance Sheet Template for Excel

Your debts are classified as funded or unfunded. While funded debt matures after more than one year or one reporting cycle, unfunded debt are the debts your business needs to pay off in one year or less..

Debt Funding vs. Equity Funding

Debt funding is one method of raising capital. It’s a conservative method when interest rates are low. Another way—equity funding—is selling stocks (shares of company ownership). If your business sells stocks, you’ll share profits and control of operations with stockholders.

Advantages of Funded Debt

• Wider Access: Debt funding is more accessible to small businesses.
• Operations Control Retention: You retain greater decision making power.
• Tax Advantages: Funded debt is tax deductible.

Disadvantages of Funded Debt

• Credit Rating: Funded debt negatively affects your credit score.
• Collateral: You expose your assets if you can’t repay your funded debt on time. If your business ceases operations, you still have to repay this funded debt.
• Cash Flow: You have to—with cash—make recurring payments.

Deciding What the Best Course of Action Is for Your Business

When interest rates are lower, it’s a better time to raise capital through funded debt. When they’re higher, choose equity funding. Where does your capital come from?

Stay ahead of change with Vena’s Scenario Planning and Analysis Software. Look into the future, plan your scenarios and determine how you should raise capital next.