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Is debt financing a perversion of capitalism? Capitalism is based upon the principle of using...

Question:

Is debt financing a perversion of capitalism? Capitalism is based upon the principle of using accrued profit (capital) to invest in the next iteration of the business cycle, thereby giving an advantage to the efficient companies.

Debt Financing

Debt financing is a way by which firms raise money through bonds and in return, promise their debtors to repay the principal amount with a good amount of interest. In debt financing, companies offer fixed income to its investors.

Answer and Explanation:

No, debt financing is not a perversion of capitalism. It is because if someone is taking your money, investing it in a project, and then returning it with a high rate of returns and that too in a short period of time, then what's the big deal?. Everyone has the aspiration to earn a secure income, and therefore, debt instruments are the finest option to invest in.

There is also nothing wrong with re-investing the profit or capital in the next iteration of the business cycle. The argument that this principle gives advantage only to efficient companies does not hold water because capitalism provides an equal chance to everyone. Is anyone stopping any firm to be productive? No. Then what's the fuss about? The principle of re-investing the profit or capital is entirely legal and moral too.


Learn more about this topic:

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What Is Financing? - Definition & Types

from Corporate Finance: Help & Review

Chapter 8 / Lesson 7
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