Provide a discussion board response to my peer below: What is Debt Financing? Debt financing is one

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Question:

Provide a discussion board response to my peer below: What is Debt Financing?

Debt financing is one of method to raise capital by borrowing money from lenders/investors. Bank loans and bonds are common types of debt financing.

Most to Least

Out of the three sectors mentioned above, hospitals/health systems is the sector that uses debt financing the most because they are capital-intensive businesses that require high initial investments such as equipments and building. Money is needed upfront compared to other sectors. Additionally, the finance structure of hospitals/health systems is a better fit with debt financing as they have steady and predictable cashflows, which makes it easier to meet debt obligations. Next sector after hospital/health systems is the medical equipment manufacturing sector because it also have initial investments to fund for such as research and development and product innovation. They have leverage with debt financing with being able to use their assets for collateral. The third sector that uses the least debt financing compared to the two sectors above is biotechnology. Biotechnology faces different conditions within the market regarding capital structure because most biotechnology companies are in early stages of development and may not be profitable yet with the combination of the intensity of research and development investments. There are considerable high risks with the financial abilities/conditions of biotechnology, such as unsteady cash flows and risk of drug development and clinical trials, that are not favorable to debt financing.

Real-Time Research

According to Yahoo Finance, looking at real-time September 2023 quarter financial statements of companies within these three sectors, the total debt/equity ratios are as follow (highest to lowest):

1) HCA (health system)= 11,518.77%

2) Medtronic (medical equipment/device)= 48.63%

3) Vertex Pharmaceuticals (biotechnology)= 4.5%

Recent Trends in Capital Financing within Biotechnology Sector

However, according to FierceBiotech, research has shown that biotechnology may be increasing their own way of debt financing called venture debt, which is "a loan for companies that have raised money from venture capital firms." This type of financing is use by fast-growing or early-stage biotech companies.

For-Profit vs Not-For-Profit regarding Debt Financing

Considering for-profit and not-for-profit hospitals/health systems, there is a slight difference within the scheme of debt financing due to the intent and organizational goals of utilizing this type of capital. For-profit is profit driven due to maximizing shareholders' value, investors' expectations, and market pressures. Not-for-profit is mission-driven to increase community benefit. However, both use debt financing to maximize profits and leverage the tax-exempt/deductible for debt payments (for-profit) and lower interest rates (not-for-profit).