Debt
From ForcaWiki, the simple encyclopedia
| In one sentence | Money you owe to someone else, which usually has to be paid back with a little extra on top called interest. |
|---|---|
| Category | Finance |
| Related | Collateral, Common Stock, Advance Rate |
Imagine borrowing 10 dollars from a friend and agreeing to pay back 11 dollars next month. That extra dollar is a small thank you for letting you use their money for a while, and it has a real name: Interest.
Debt is that same idea at a much bigger scale. It is money a person or a company owes to somebody else, usually a bank or another lender, and it almost always has to be paid back with interest added on top. In the movie business, debt is one of the most common ways films get financed, often through a bank loan made against contracts like a Minimum Guarantee, using an Advance Rate to figure out how much can be borrowed.
How it is different from selling stock
Debt is very different from raising money by selling Common Stock. A lender is owed a fixed amount no matter what happens to the business, and typically gets paid back before stockholders see anything. But a lender never gets to own any part of the company or share extra in its success. They just get their money back, plus interest, and nothing more.
Fun facts
- Loan agreements almost always spell out Collateral, something valuable the lender is allowed to take if the debt does not get repaid.
- Movies are very often financed mostly with debt rather than by selling stock in just that one film, since a single movie is not something the public can easily buy a share of the way they can a whole studio.
- A company can be perfectly profitable and still run into serious trouble if it cannot pay its debts on time, which is why lenders care so much about Cash, not just profit, before agreeing to a loan.