Loans

What is debt?

Loan capital (debt) can, broadly, be compared and contrasted with share capital (equity). The distinction between debt and equity is critical but not always obvious. Some of the key features of debt are:

1. •

   creditors (lenders) rank ahead of shareholders during an insolvency procedure (ie a lender will need to be repaid before a shareholder)

2. •

   debt normally attracts some form of regular return (eg interest) whereas shares will entitle holders to dividends but only if the company has sufficient distributable reserves to fund them and the board approves them

3. •

   unlike equity, the value of a company's debt will not (normally) be linked to the performance of the company itself, and

4. •

   from a tax perspective, the cost of borrowing money (eg interest) will normally be deductible in calculating a company's profits (ie it is 'above the line')—by contrast, dividends and other distributions, broadly payable on equity instruments, will not be deductible (ie they are paid out of the company's net profit and so are 'below the line')

Borrowing