All businesses need capital to function; capital is raised in primarily two ways;
- 1) Borrowing
- This creates debt , creating a debtor/creditor relationship in which teh debtor (brrower) promises to pay back the principal and interest for the use of the funds to the creditor (lender) at a certain date and on a regular basis.
- Creditors have priority over equity holders and must be paid interest on the money borowed before dividends are paid to shareholders. In a dissolution of the corporation, creditors receive their principal before equity holders receive anything. Fialrue of the
- 2) Investment of funds by owners