Funded and Unfunded Debt

Funded debt refers to long-term borrowing, typically with a maturity period extending beyond one year. In contrast, unfunded debt is a short-term financial obligation that is due within a year or less.
Funded and Unfunded Debt
3 min

Understanding the basics of debt is key for businesses to make prudent financial choices. In this article, we explore the differences between funded and unfunded debt and look at their traits, uses, and what they mean for managing finances.

What is a funded debt?

Funded debt, also referred to as long-term debt, is debt that takes a long time to mature—typically more than a year or a business cycle. For the loan, the borrowing corporation will make interest payments to cover the cost of this kind of debt. Long-term initiatives like growing operations, doing research & development, creating additional locations, or introducing new product lines are frequently financed via funded debt.

Funded debt is different from equity financing in that it doesn't require selling shares to raise money; instead, it entails issuing debt instruments or getting bank financing. Lenders and investors receive money from interest paid on funded debt.

Also read: Difference between Assets and Liabilities

Types of funded debt

Debt financing involves a company raising capital by selling debt instruments like bonds, bills, or notes to investors. The key types of funded debt include:

  • Bonds: These are fixed-income securities issued by a company that must be repaid at a future date, with interest paid to the bondholders. This includes corporate bonds, government bonds, and municipal bonds.
  • Long-term notes payable: These are long-term loans from banks or other lenders that are repaid over an extended period, typically more than one year.
  • Convertible bonds: Convertible bonds are bonds that can be converted into equity shares of the company at a predetermined price and time.
  • Debentures: Debentures are unsecured bonds backed only by the general creditworthiness and reputation of the issuer rather than by specific assets.
  • Term loans: Term loans are lump sum loans from banks or financial institutions that are repaid over a fixed period, often with regular monthly payments.

The key characteristic of funded debt is that it has a maturity period of more than one year, unlike short-term "unfunded" debt. Funded debt provides long-term financing for companies and is considered a safer investment for lenders compared to equity.

Examples of funded debt

Funded debt refers to a company's long-term debt that matures in more than one year or one business cycle. Some examples of funded debt instruments include:

  • Bonds with fixed maturity dates of over a year
  • Convertible bonds
  • Debentures
  • Long-term notes payable
  • Mortgages

Funded debt is considered a safer financing option compared to short-term or unfunded debt, which matures in a year or less and is used to cover more immediate expenses. Funded debt is recorded as a long-term liability on the borrowing company's balance sheet, while for lenders, it is listed as an asset.

Also read: Difference between equity and assets

How to analyse funded debt?

Here are the key points to analyse funded debt:

  • Funded debt instruments: Funded debt can take the form of bonds with fixed maturity dates over a year, convertible bonds, debentures, long-term notes payable, and mortgages. These are long-term borrowing instruments that provide long-term financing for the company.
  • Funded debt ratio: Analysts use the capitalisation ratio (or cap ratio) to compare a company's funded debt to its total capitalisation (long-term debt + shareholders' equity). A higher capitalisation ratio indicates the company has more long-term debt relative to its capital structure, which can be risky if not serviced properly.
  • Debt to net capital ratio: This ratio compares the company's long-term debt to its net working capital. An ideal ratio is below 1, indicating the long-term debt does not exceed the net capital available.
  • Advantages of funded debt: Funded debt provides companies with long-term financing at fixed interest rates, which can be advantageous compared to short-term "unfunded" debt. The interest payments on funded debt are also tax-deductible.
  • Risks of funded debt: High levels of funded debt increase a company's leverage and insolvency risk if the debt cannot be serviced. Analysts look at metrics like the funded debt to EBITDA ratio to assess the company's ability to cover its debt obligations.
  • Comparison to equity financing: Funded debt allows companies to raise capital without diluting ownership, unlike equity financing, where companies sell shares to investors.

Also read: What are non-current assets

Understanding unfunded debt

Short-term financial liabilities that are normally due in a year or less are referred to as unfunded debt. Companies employ these commitments to pay for urgent costs in situations where they might not have enough cash on hand to cover their regular operating expenses. Short-term bank loans and corporate bonds with short maturities—typically within a year—are examples of underfunded debt. Unfunded debt is a more immediate approach to managing cash flow and liquidity than funded debt, which entails longer-term financing and has fixed maturity dates greater than a year.

Also read: SIP investment in mutual funds

Types of unfunded debt

Unfunded debt refers to short-term debt obligations that have a maturity period of less than one year. The key types of unfunded debt include:

  • Treasury bills: These are short-term government securities that mature in less than one year, typically ranging from a few days to 52 weeks. Treasury bills are sold at a discount to their face value and do not pay regular interest.
  • Commercial paper: A commercial paper is an unsecured short-term debt instrument issued by a corporation to meet short-term financing needs, with maturities ranging from 1 to 270 days.
  • Short-term bank loans: These are loans from banks or other lenders that must be repaid within one year and are often used to cover temporary cash flow gaps.
  • Accounts payable: This is the money a company owes to its suppliers and creditors, typically due within 30-90 days.

Examples of unfunded debt

Unfunded debt refers to short-term financial obligations that mature within a year or less, in contrast to funded debt, which has a maturity period of more than a year.

Examples of unfunded debt include:

  • Corporate bonds maturing within a year
  • Short-term bank loans
  • Short-term floating debt not represented by bonds

Also read: What is current ratio

How to analyse unfunded debt

To analyse unfunded debt, the key considerations include:

  • Maturity profile: Examine the breakdown of unfunded debt by maturity dates, as shorter maturities increase refinancing risk.
  • Interest rate sensitivity: Assess how changes in interest rates would impact the cost of servicing unfunded debt.
  • Liquidity position: Evaluate the company's ability to repay unfunded debt from cash flows or other liquid resources.
  • Debt service coverage: Calculate ratios like the current ratio to gauge the firm's capacity to meet short-term obligations.
  • Funding sources: Understand the company's access to and reliance on short-term financing, such as bank lines of credit.

Funded vs Unfunded debt

Funded debt differs from unfunded debt in several ways. Key differences include:

Funded debt

  • The maturity period exceeds one year
  • Has fixed maturity dates, bears interest, and is considered long-term
  • Commonly used for long-term projects

Unfunded debt

  • Typically matures within a year
  • Includes short-term obligations like treasury bills and short-term bank loans
  • Used for covering immediate financial needs
  • Poses interest rate and refinancing risks

Key takeaways

  • Often used for large, long-lasting projects, funded debt, also known as long-term debt, takes more than a year to pay off and includes paying interest over time.
  • The funded debt to EBITDA ratio is a way to check a company's risk and financial health by weighing its profit against its long-term debt.
  • Short-term costs, like corporate bonds that need to be paid off soon and short-term bank loans for quick cash needs, are handled by unfunded debt, which is due within a year.


Funded debt lets businesses safely fund big, long-lasting projects by paying interest over time. In contrast, unfunded debt helps with quick expenses but carries more risk due to its short lifespan. Knowing the difference helps manage a company's debts well.

The Bajaj Finserv Mutual Fund Platform features multiple tools, from an online lumpsum calculator to a SIP calculator, intending to make mutual fund investment planning easier. With over 1,000 mutual funds to choose from, the Bajaj Finserv Platform is the ideal place to begin your investment journey.

Essential tools for mutual fund investors

Mutual Fund Calculator Lumpsum Calculator Mutual Funds SIP Calculator Step Up SIP Calculator
SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator ABSL SIP Calculator
Tata SIP Calculator BOI SIP Calculator   Kotak Bank SIP Calculator

Frequently asked questions

What is funded and unfunded debt?
Funded debt refers to long-term financial obligations with maturity periods exceeding a year, funded through interest payments over the loan term. Unfunded debt, on the other hand, includes short-term obligations due within a year, serving immediate cash flow needs.
What does it mean to fund a debt?
To fund a debt means to provide financing for a financial obligation, typically through interest payments made by the borrower over the term of the loan or through other sources of capital.
Is debt funding bad?
Debt funding isn't inherently bad; it can be a strategic financial tool for businesses to finance growth initiatives or manage cash flow. However, excessive debt levels or mismanagement can lead to financial difficulties, affecting a company's stability and growth prospects.
Are debt funds safe?
Debt funds can offer relatively safe investment options depending on factors such as the credit quality of underlying securities, diversification, and the fund's management strategy. However, like any investment, they carry risks, including market fluctuations, interest rate changes, and credit defaults. Investors should conduct thorough research before investing.

Show More Show Less

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more


1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.