Which term describes financing by borrowing funds?

• A. Debt financing
• B. Equity financing
• C. Grant funding
• D. Lease financing

Answer: (A)

When you borrow money to fund operations or investments, you’re engaging in debt financing. This means a business raises capital by taking loans or issuing bonds and commits to repaying the borrowed amount plus interest over time. It preserves ownership because lenders don’t receive any equity stake. The payments are contractual, and the cost of this financing is the interest rate, which affects cash flow and financial risk.

In contrast, equity financing involves selling ownership shares, which brings in funds but dilutes control. Grant funding is money given without repayment requirements (often with conditions). Lease financing provides temporary access to an asset without purchasing it, which is about using the asset rather than raising funds to own it. Therefore, the term that describes financing by borrowing funds is debt financing.