Fremdkapitals

Fremdkapital, often translated as debt capital, refers to capital raised from external creditors that must be repaid and typically carries interest. It forms part of a company’s capital structure alongside equity (Eigenkapital). The term is used in several Scandinavian languages and is contrasted with owner-provided funds.

Sources and types include short-term debt such as supplier credit and bank overdrafts, and long-term debt such as bank loans and corporate bonds. Leasing and other lease liabilities are also commonly treated as forms of Fremdkapital in financial reporting.

Key characteristics are that Fremdkapital involves fixed or determinable payments, has a defined maturity, and generally holds seniority in claims during liquidation. Lenders may impose covenants and monitoring requirements, and interest rates can be fixed or variable.

Advantages of Fremdkapital include the tax shield from interest deductibility in many jurisdictions, the potential for a higher return on equity through leverage, and the fact that ownership remains unaffected by debt financing. Disadvantages include mandatory interest and principal payments, increased financial risk, and potential constraints on a company’s operations during downturns.

Measuring and managing Fremdkapital involve metrics such as debt-to-equity ratio, debt ratio, and interest coverage ratio. The optimal balance between Fremdkapital and Eigenkapital depends on factors like industry, business risk, tax environment, and access to capital, and it is a central concern in corporate finance and strategic planning.