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If you manage a business, borrowing money might be part of your strategy, whether for daily operations, expansion, or covering unexpected expenses. This borrowed money is known as corporate debt.
As of January 2025, U.S. companies have accumulated approximately $12.37 trillion in corporate debt, with about $5.9 trillion set to mature by 2029. While this debt can be a useful tool for growth, it also brings challenges.
In 2023, the number of U.S. corporate defaults more than doubled to 82 from 32 in the previous year. This increase highlights the importance of understanding and managing corporate debt effectively.
Mismanaging debt can lead to financial strain, reduced creditworthiness, and missed opportunities. On the other hand, a well-thought-out debt strategy can support your business's growth and stability.
In this blog, you’ll understand what corporate debt means, how it works, and how you can manage it efficiently. Let’s begin with getting a clear picture of what this means.
What Is Corporate Debt?
Corporate debt is money your business borrows to fund operations, cover expenses, or invest in growth. This could be through loans, bonds, or other financial tools. The key is that this money promises to pay it back, usually with interest.
You might use debt to buy equipment, manage cash flow, or expand into new markets. Handled wisely, it can help your business grow. But without a clear plan, it can become a burden.
Here are the main ways businesses like yours borrow money:
Understanding the difference between secured and unsecured debt is crucial:
Suggested Read: Dealing with Your Small Business Debt
If you're looking to understand how to manage these different types of debt effectively, Shepherd Outsourcing Services offers tailored solutions to help you stay on track.
Let’s understand why businesses need corporate debt.
Debt isn’t just something you fall back on when cash is tight—it’s often a smart move. If you're running a business, borrowing money can help you grow faster, handle day-to-day expenses, and stay in control of your company. Instead of giving up equity, you get the funding you need while still calling the shots.
Here’s why businesses like yours turn to debt as a financial strategy:
Debt can provide the necessary funds to invest in new projects, enter different markets, or upgrade equipment. For instance, in 2024, U.S. companies issued approximately $657.7 billion in new corporate bonds, indicating a strong demand for capital to support business initiatives.
Even profitable businesses can face short-term cash flow challenges. Access to credit lines or short-term loans helps cover immediate expenses like payroll or inventory purchases.
Interest payments on debt are typically tax-deductible, reducing the overall taxable income. This can make debt a more attractive financing option than equity, which doesn't offer the same tax benefits.
Business owners can raise capital without giving up equity by opting for debt financing. This means maintaining control over company decisions and future profits.
Now that we've covered why companies take on debt, let's understand the different types of debt instruments available, so you can better understand your options when it comes to borrowing.
When businesses like yours need to borrow money, they have several options. Each type of debt instrument has its own characteristics, costs, and benefits. Here's a breakdown of the most common types:
Bank loans are a traditional form of debt financing. They can be either secured or unsecured and are typically used for long-term investments or significant capital expenditures.
Issuing bonds allows companies to raise capital from investors. In return, the company agrees to pay interest over a specified period and repay the principal amount at maturity.
In 2024, global corporate debt sales reached a record $8 trillion, driven by strong investor demand and favorable borrowing conditions.
A credit line provides businesses with flexible access to funds up to a certain limit. Interest is only paid on the amount drawn, making it a cost-effective option for managing short-term financial needs.
Commercial paper is a short-term, unsecured debt instrument corporations issue to finance immediate expenses like payroll or inventory. Maturities typically range from 1 to 270 days, with an average of around 30 days.
Now that you’ve understood the types, let’s understand how corporate debts work.
Once a business takes on debt, it enters a process that includes borrowing, utilizing the funds, and repaying the debt over time. This process involves several key steps, including the management of interest payments, understanding repayment structures, and knowing when and how to refinance. Knowing how corporate debt works helps you make better decisions about borrowing and managing your business's financial health.
When a company needs capital, it borrows money through various instruments like loans, bonds, or credit lines. In 2024, U.S. companies issued approximately $657.7 billion in new corporate bonds, highlighting the significant role of debt in business financing.
Suggested Read: Pros and Cons of Different Types of Debt Financing
The borrowed funds are used for various purposes, such as expanding operations, purchasing equipment, or covering operational expenses. For instance, companies may use debt to invest in new projects or manage cash flow during periods of growth.
Debt repayment typically involves periodic interest payments and the return of the principal amount at the end of the term. The terms of repayment are outlined in the debt agreement and can vary based on the type of debt instrument.
As the debt matures, companies may choose to refinance by issuing new debt to pay off the existing obligations. This is often done to take advantage of favorable market conditions or to extend the repayment period.
Refinancing can help companies manage their debt more effectively, but it also introduces risks, such as the potential inability to secure new financing if market conditions change.
While borrowing can support growth and operations, it's essential to recognize the potential pitfalls associated with corporate debt. Here's what you should be mindful of:
Taking on too much debt can strain your company's finances. In 2024, U.S. companies defaulted on leveraged loans at the fastest rate since 2020, reaching 7.2% in the 12 months to October, due to high interest rates.
Rising interest rates can increase the cost of servicing debt. The Federal Reserve noted that in a severely adverse scenario, the percentage of debt at risk could reach almost 40% by the end of 2024.
High levels of debt can negatively affect your company's credit rating, making future borrowing more expensive or difficult. Moody's reported that U.S. firms' default risk hit 9.2%, a post-financial crisis high.
Failing to meet debt obligations can lead to legal consequences, including bankruptcy proceedings, which can disrupt operations and damage your company's reputation.
If you're concerned about managing your company's debt, Shepherd Outsourcing Services can assist in negotiating better terms and reducing your financial burden.
You've seen how debt can help a business grow, but it's not the only option. Equity financing is another route. Understanding the differences between debt and equity financing can help you decide what's best for your business.
Equity financing involves raising capital by selling shares of your company to investors. Unlike debt, there's no obligation to repay the funds or pay interest. However, it does mean sharing ownership and, potentially, decision-making power.
Understand the difference between these two options in the table below:
Consider debt financing if you have predictable cash flows and want to maintain control. It's often suitable for established businesses with steady revenues.
Equity financing might be appropriate if you're a startup or if your business doesn't have the cash flow to support regular debt repayments. It can provide the necessary capital without the immediate pressure of repayments.
Many businesses use a combination of both to balance the benefits and drawbacks.
Effective debt management is essential for maintaining financial health. Here are some best practices to consider:
Recognizing when to seek professional assistance is crucial for preventing financial distress. Consider reaching out to debt management professionals if:
Engaging professionals can provide the guidance and support needed to navigate complex financial situations and develop sustainable solutions.
Suggested Read: Understanding Operating Expense and Debt Service in Business
Corporate debt isn’t something to shy away from. It’s a tool, just like any other in business. When used wisely, it can help your company grow, expand, and stay competitive. But when it starts piling up or becomes tough to manage, it can quietly eat away at your financial stability.
You don’t have to handle it all alone. If you’re finding it hard to keep up with repayments, juggling multiple creditors, or unsure what your next move should be, we are here to support you.
Shepherd Outsourcing Services works with businesses like yours to simplify debt, talk to creditors on your behalf, and build a plan that actually works.
Need a smarter way to deal with debt? Reach out today and find out how you can take back control of your finances, without the stress.
A: Corporate debt refers to borrowed funds that a business must repay, including loans, bonds, and credit lines.
A: High levels of unmanaged debt can lower your credit rating, increasing borrowing costs and limiting access to financing.
A: Debt management focuses on organizing and repaying debts, while debt settlement involves negotiating to reduce the total amount owed.
A: Consider debt settlement when your company struggles to meet repayment obligations and seeks to avoid default or bankruptcy.
A: Yes, especially when businesses owe money and creditors outsource collection processes to recover outstanding debts.
A: Yes, experts like Shepherd Outsourcing Services can negotiate with creditors to lower payoff amounts and develop manageable repayment plans.
©2024 by Shepherd Outsourcing.