Debt financing means borrowing money and promising to pay it back with interest. Companies issue bonds, take bank loans, or use credit lines. Unlike equity financing (selling ownership), debt does not dilute existing shareholders. You keep 100% ownership but take on the obligation of regular interest payments and eventual principal repayment.
The biggest advantage of debt: the tax shield — interest payments are tax-deductible. If a company pays 8% interest and has a 25% tax rate, the after-tax cost is only 6%. This makes debt cheaper than equity (which is not tax-deductible). This tax benefit is why even cash-rich companies like Apple carry significant debt — $100+ billion.
The danger: debt is a fixed obligation regardless of business performance. Miss an interest payment and you face default, lawsuits, and potentially bankruptcy. Equity has no such risk — you can skip dividends without legal consequences. The 2020 COVID shutdown bankrupted companies with heavy debt (Hertz, JCPenney) while debt-free companies survived easily.