A company's balance sheet provides a snapshot of its financial health at a particular point in time. Debt level and type strongly impact the balance sheet. Too much debt increases a company’s financial risks, but too much equity dilutes an owner’s return. However, in addition to debt financing, companies can use leases to acquire assets. Only leases categorized as financing appear on the balance sheet.

Debt Financing Defined

Debt financing involves borrowing money. When you use debt financing to fund growth or operations, you take on loans or similar financing obligations. Unlike equity financing, you do not give up any ownership in your company. You pay back the principal amount you borrowed along with the interest charged on the principal amount. Debt financing often comes with stipulations about how much additional debt your company can take on, how profitable it must remain and the cash flow your company must generate. You can deduct the interest on the debt from your company's taxable income.

Debt Financing Sources

Debt financing provides leverage. It enables you to stretch the funds you have in owner's equity to help accomplish company goals. The most common type of financing small businesses obtain is a bank loan. These include government-guaranteed loans, lines of credit and term loans. Additional sources of debt include accounts receivable financing firms that lend against your company's receivables and equipment lenders, who lend funds for equipment and use the equipment as collateral. Debt financing also includes mortgage loans that you use to acquire real property.

Lease Financing

Lease financing involves the use of a lease to acquire access to an asset. A lease is an agreement that allows your company to use another company's asset for a specified time period in exchange for payment. Lease financing can be similar to nearly 100 percent financing, since your company gains full access to the asset typically without requiring a deposit or upfront outlay of cash.

Capital and Operating Leases

Leases are either capital leases or operating leases. Capital leases are basically an acquisition and financing contained in one. With a capital lease, the leased asset appears on your balance sheet as an asset, and the lease appears as a liability. An operating lease is considered a pure rental and therefore does not appear on your balance sheet. In general, if the lease essentially transfers all risks and benefits to your company and addresses residual value, account for the lease as a capital lease.