Which statement is NOT a correct characteristic of debt financing?

Which statement is NOT a correct characteristic of debt financing?

• A. It requires repayment with interest.
• B. It typically does not dilute ownership.
• C. It involves selling ownership stakes to investors.
• D. It may require collateral.

Answer: (C)

Debt financing means borrowing money that must be paid back with interest. The lender is a creditor, not an owner, so the funds come with a debt obligation rather than an equity stake. Because you’re borrowing, you typically don’t give up ownership in the company, and investors don’t participate in profits or governance as owners would. Collateral is often involved in debt financing to protect the lender, though not every loan requires it. The important point is that you repay principal plus interest, and ownership remains with the original owners. The statement about selling ownership stakes describes equity financing, where investors receive shares and a claim on ownership. That’s why it isn’t a correct characteristic of debt financing. So the true features here are: repayment with interest, no ownership dilution, and the possible use of collateral.

Debt financing means borrowing money that must be paid back with interest. The lender is a creditor, not an owner, so the funds come with a debt obligation rather than an equity stake. Because you’re borrowing, you typically don’t give up ownership in the company, and investors don’t participate in profits or governance as owners would.

Collateral is often involved in debt financing to protect the lender, though not every loan requires it. The important point is that you repay principal plus interest, and ownership remains with the original owners.

The statement about selling ownership stakes describes equity financing, where investors receive shares and a claim on ownership. That’s why it isn’t a correct characteristic of debt financing.

So the true features here are: repayment with interest, no ownership dilution, and the possible use of collateral.