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Which of the following statements about debt financing is FALSE? A. Debt financing comes from banks or other commercial lenders, B. When a bank gives a company a loan, they become partial owners of the company. C. Companies often have to pay interest when they use debt financing. D. It’s harder for startups to get debt financing
The Correct Answer and Explanation is:
Based on the provided image, the correct answer is B.
Correct Answer: B. When a bank gives a company a loan, they become partial owners of the company.
Explanation
This statement is false because it confuses debt financing with equity financing. These are two fundamentally different ways for a company to raise capital.
Debt financing is the process of borrowing money that must be paid back over time, almost always with interest. When a company secures a loan from a bank or another commercial lender, it enters into a debtor-creditor relationship. The company (the debtor) is legally obligated to repay the principal amount of the loan plus the agreed-upon interest to the lender (the creditor). The lender does not receive any ownership or equity in the company. Their claim is limited to the repayment of the loan. If the company fails to pay, the lender can take legal action to recover the money, which might involve seizing assets pledged as collateral, but they do not become owners.
The other options are all true statements about debt financing:
- A. Debt financing comes from banks or other commercial lenders. This is the primary source for companies seeking loans. Banks, credit unions, and specialized lending institutions are the typical providers of debt capital.
- C. Companies often have to pay interest when they use debt financing. Interest is the cost of borrowing money. It is the lender’s compensation for taking on the risk of the loan and for allowing the company to use its capital. It is a standard and expected part of any debt agreement.
- D. It’s harder for startups to get debt financing. Lenders evaluate the risk of a loan not being repaid. Startups are generally considered high-risk because they often lack a proven track record, consistent revenue, or significant assets to use as collateral. Established companies with a history of profitability are seen as safer investments, making it easier for them to secure loans.
