What is Funded Debt?
A company's debt with a maturity period of more than one year or one business cycle is called funded debt. The term funded debt is coined because the lender company is funded by the interest payment made by the borrowing company over the loan tenure. They can also be categorised as long-term debt since the loan term is more than a year.
Funded debts are unlike equity financing, where companies sell their stock to raise capital from investors. Some examples of funded debts include bonds with fixed maturity dates that is more than a year away, long-term notes payables, convertible bonds, and debentures.
Breaking Down Funded Debts
A company takes a loan by either issuing debt in the open market or through financing from a lending institution. The loan may be taken for several reasons, such as launching a new product or expanding the business to new locations or sectors.
In this context, any financial obligation that extends to a period more than 12 months or the current business year is referred to as funded debt. They are made up of long-term, fixed-maturity borrowing that bears interest.
From the investor's perspective, this kind of debts serves as funding as they receive interest charges. The greater the ratio of funded debts to total debts disclosed in the debt note, the better it is for the investors. Also, it is a safe way of raising capital for the borrower as they include a long repayment term.
Funded debts are calculated as long-term liabilities minus the shareholders' equity.
Unfunded Funded Debt
Corporate debt can either be funded or unfunded. In contrast to funded debt, unfunded debts are short-term financial obligations that are due in a year or less. Companies choose unfunded debts when they are short of cash to cover day-to-day expenses. Corporate bonds that mature within a year and short-term bank loans are the examples of unfunded debts.
