Using Debt to Finance the Organization
Organizations can finance their missions in several ways, but the two most common methods are equity and debt. Equity means you sell a portion of the organization in the form of stock or units of ownership, and the buyer now owns part of your organization. The other way to finance your organization is by Debt. Many organizations use bank loans and lines-of-credit to support their working capital needs to finance the day-to-day operations. There are pros and cons to using debt, the biggest pro is that you are not selling a part of your organization, you are just borrowing the money. That is also the potential down fall. Borrowing the money means you have to have a plan to repay the principal and the interest that are due at a future date. The key factor for determining if you finance the operation with debt is whether or not the organization has adequate cash flow to repay the loan and interest.