Debt and Credit

Debt and Credit

Debt is an obligation owed by one party to another party. In corporate finance, debt is a means of using anticipated future purchasing power in the present before it has actually been earned. Some corporations use debt to leverage the investment made on their assets. Beasley, Myers, and Marcus (Breasley, Marcus, and Myers, 2012, para 3, pg. 456) says “borrowing money reduces the firm’s tax bill and increases the cash payment to the investors. The value of their investment goes up by the present value of the tax savings”. However, companies have to be careful with the amount of debt it carries as this could lead to creditors being concerned about their ability to pay and will charge a higher interest rate on the money borrowed. Ecclesiastes 5:5 teaches us “it is better not to make a vow than to make one and not fulfill it” (Holy Bible: New International Version, Eccles. 5:5). Higher interest rate mean the company would have to spend more operating income to pay interest and not benefit from the tax break the government offers to companies that pay corporate taxes. The significant of not being able to take advantage of this tax benefit could lead to a company’s ability to meet its financial obligation. The Bible does not say it is a sin to borrow money, but it clearly warns us about the danger of having debt. Deuteronomy 28: 43-44 says “the foreigners who reside among you will rise above you higher and higher, but you will sink lower and lower. They will lend to you, but you will not lend to them. They will be the head, but you will be the tail.” Debt becomes a problem for corporations only when it causes them to sin by not meeting their obligations; in other words, when they can’t repay the debt or debt causes them to neglect what should matter most to them i.e. the support of their employees, customers, communities, and shareholders. Jesus paid a tremendous debt for human sin that no one, not even a corporation, could ever pay back;...