Other Methods of Debt Financing
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Loans and bonds aren't the only way to raise debt. Three other common methods are commercial paper, a line of credit, and leasing a fixed asset instead of buying it outright.
What is commercial paper?
Commercial paper is unsecured, short-term debt — it isn't backed by any collateral, and it matures in less than nine months. Companies typically issue it to cover short-term obligations, like payroll or inventory purchases, rather than to fund anything long-term.
What is a line of credit?
A line of credit is an arrangement with a bank that lets a company borrow up to a set limit whenever it needs to. The company isn't required to draw on it at all — it's there as available capacity, and the company only pays interest on the amount it actually borrows.
How does leasing work as a form of debt financing?
Leasing means renting a fixed asset instead of buying it. Say a company needs a new vehicle but doesn't want to purchase one outright: it leases the vehicle instead, making lease payments for the life of the lease in exchange for the right to use it. The lease expense is tax-deductible.
Each method fits a different need. Commercial paper covers short-term cash needs cheaply and without collateral; a line of credit provides flexible, on-demand borrowing capacity; leasing lets a company use an asset without committing the cash (or the debt) to buy it outright.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.