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is the amount of money a borrower must pay to his lender in order to keep his loans out of default. It consists of the interest and principal payments that are required to pay off the loan. Debt service payments reduce cash flow, which explains why equity investments, which do not require repayments, are often preferable. Debt service also explains why certain types of venture companies, such as SBICs, SSBICs, and BDCs, usually structure their fundings as loans with warrants instead of as straight equity purchases. These types of companies rely on borrowed funds to provide all or most of their capital. By using loans when they invest, these venture firms are able to use the debt service payments from their portfolio companies to repay their loans and stay out of default. See: BDCs (Business Development Corporations), Cash Flow, Default, Debentures, Leverage, SBICs (Small Business Investment Companies), SSBICs (Specialized Small Business Investment Companies).
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