Debt

A revenue-based financing loan comes with a fixed repayment target that is reached over a period of several years. This type of loan generally comes with a repayment amount of 1. Repayment periods are flexible; businesses can pay back the agreed-upon amount sooner, if possible, or later. In addition, business owners do not sell equity or relinquish control when using revenue-based financing.

Lenders that provide revenue-based financing work more closely with businesses than bank lenders, but take a more hands-off approach than private equity investors. A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan. A syndicated loan is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity.

A company may also issue bonds , which are debt securities. Bonds have a fixed lifetime, usually a number of years ; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments known as coupons during the life of the bond.

A letter of credit or LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities streets, sidewalks, stormwater ponds, etc. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client.

Almost all letters of credit are irrevocable, i. In executing a transaction, letters of credit incorporate functions common to giros and traveler's cheque. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice , bill of lading , and a document proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

Companies also use debt in many ways to leverage the investment made in their assets , "leveraging" the return on their equity. This leverage , the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. Governments issue debt to pay for ongoing expenses as well as major capital projects. Government debt may be issued by sovereign states as well as by local governments, sometimes known as municipalities. Debt issued by the government of the United States, called Treasuries , serves as a reference point for all other debt.

There are deep, transparent, liquid, and open capital markets for Treasuries. In finance, the theoretical " Risk-free rate " rate is often approximated by practitioners by using the current yield a Treasury of the same duration.

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The overall level of indebtedness by a government is typically shown as a ratio of debt-to-GDP. This ratio helps to assess the speed of changes in government indebtedness and the size of the debt due. The debt service coverage ratio is the ratio of income available to the amount of debt service due including both interest and principal amortization, if any. The higher the debt service coverage ratio, the more income is available to pay debt service, and the easier and lower-cost it will be for a borrower to obtain financing.

Different debt markets have somewhat different conventions in terminology and calculations for income-related metrics. For example, in mortgage lending in the United States, a debt-to-income ratio typically includes the cost of mortgage payments as well as insurance and property tax, divided by a consumer's monthly income. The loan-to-value ratio is the ratio of the total amount of the loan to the total value of the collateral securing the loan. For example, in mortgage lending in the United States, the loan-to-value concept is most commonly expressed as a " down payment.

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A debt obligation is considered secured if creditors have recourse to specific collateral. Collateral may include claims on tax receipts in the case of a government , specific assets in the case of a company or a home in the case of a consumer. Unsecured debt comprises financial obligations for which creditors do not have recourse to the assets of the borrower to satisfy their claims.

Credit bureaus collect information about the borrowing and repayment history of consumers. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him or her a credit rating.

Thus a government or corporation with a high rating would have Aaa rating. A change in ratings can strongly affect a company, since its cost of refinancing depends on its creditworthiness. Their high risk of default approximately 1. Bad Debt is a loan that can not partially or fully be repaid by the debtor.

The debtor is said to default on his debt. These types of debt are frequently repackaged and sold below face value. Buying junk bonds is seen as a risky but potentially profitable investment. Bonds are debt securities , tradeable on a bond market. A country's regulatory structure determines what qualifies as a security. Loans may be sold or acquired in certain circumstances, as when a bank syndicates a loan.

Loans can be turned into securities through the securitization process. In a securitization, a company sells a pool of assets to a securitization trust, and the securitization trust finances its purchase of the assets by selling securities to the market. For example, a trust may own a pool of home mortgages , and be financed by residential mortgage-backed securities. In this case, the asset-backed trust is a debt issuer of residential mortgage-backed securities. Central banks , such as the U.

Federal Reserve System , play a key role in the debt markets. Debt is normally denominated in a particular currency , and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to inflation or deflation , so it can happen even though the borrower and the lender are using the same currency. Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level.

Islam forbids lending with interest even today. In hard times, the cost of servicing debt can grow beyond the debtor's ability to pay, due to either external events income loss or internal difficulties poor management of resources. Debt with an associated interest rate will increase through time if it is not repaid faster than it grows through interest.

This effect may be termed usury , while the term "usury" in other contexts refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted. In international legal thought, odious debt is debt that is incurred by a regime for purposes that do not serve the interest of the state.

Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. International Third World debt has reached the scale that many economists [ who? Excessive debt accumulation [ clarification needed ] has been blamed for exacerbating economic problems [ by whom? When expectations corrected, deflation and a credit crunch followed.

Deflation effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their consumption and investment.

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The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased debt cost caused by deflation and the reduced demand.

At the household level, debts can also have detrimental effects — particularly when households make spending decisions assuming income will increase, or remain stable, in years to come. When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include unexpected unemployment, relationship break-up, leaving the parental home, business failure , illness, or home repairs. Over-indebtedness has severe social consequences, such as financial hardship, poor physical and mental health, [15] family stress, stigma, difficulty obtaining employment, exclusion from basic financial services European Commission , , work accidents and industrial disease, a strain on social relations Carpentier and Van den Bosch, , absenteeism at work and lack of organisational commitment Kim et al.

Global debt underwriting grew 4. It is expected to rise in the coming years if the spending habits of millions of people worldwide continue the way they do. Traditions in some cultures demand that debt be forgiven on a regular often annual basis, in order to prevent systemic inequities between groups in society, or anyone becoming a specialist in holding debt and coercing repayment.

An example is the Biblical Jubilee year , described in the Book of Leviticus. From Wikipedia, the free encyclopedia. For other uses, see Debt disambiguation. Not to be confused with Debit. This article needs additional citations for verification. It is important to note here that debt commonly comes to mind when one considers liabilities, but not all liabilities are debt.

Companies may incur several other types of liabilities, including but not limited to upcoming payroll , bonuses, legal settlements, payments to vendors , certain derivatives , contracts, certain types of leases, and required stock redemptions. Common balance sheet categories for liabilities include accounts payable , accrued expenses and debt. Excessive debt can ruin a company but is not always detrimental. The use of debt financing can magnify profits that would have otherwise gone unrealized. See the full definition for debt in the English Language Learners Dictionary.

I a debt for alimony. It is often up to the courts to decide what is or is not a debt under various laws. Courts disagree whether criminal restitution is a debt under the Bankruptcy Code. An income tax deduction is allowed for bad debts. Old French dette , ultimately from Latin debita , plural of debitum debt, from neuter of debitus , past participle of debere to owe.

Words that rhyme with debt. Translation of debt for Spanish Speakers. Translation of debt for Arabic Speakers. Encyclopedia article about debt. What made you want to look up debt? Please tell us where you read or heard it including the quote, if possible. Test Your Knowledge - and learn some interesting things along the way. Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free! Do you feel lucky? Our Word of the Year justice , plus 10 more. How we chose 'justice'. And is one way more correct than the others?

How to use a word that literally drives some people nuts. The awkward case of 'his or her'. Identify the word pairs with a common ancestor. Test your vocabulary with our question quiz! Synonyms for debt Synonyms arrearage , arrears , indebtedness , liability usually liabilities , obligation , score Visit the Thesaurus for More. Examples of debt in a Sentence He is trying to pay off gambling debts. The company has run up huge debts. Their debts are piling up. He's been working three jobs in an attempt to get out of debt.

The company was in debt but is now turning a profit. I am deep in debt.

I'm thousands of dollars in debt.