[Finterest] Why big businesses borrow billions — even when they don’t have to

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By borrowing, companies can get funding quickly without giving up ownership or committing to the higher return demands of equity investors

MANILA, Philippines – Why do some of the richest corporations — controlled by the country’s wealthiest families — keep on borrowing billions?

These conglomerates dominate the economic landscape, so much so that we can’t unentangle them from our everyday lives. Just take San Miguel Corporation (SMC) for example. We drive on their roads (Skyway System) with cars filled with their fuel (Petron) and fly through airports they co-own (NAIA). We eat their food (San Miguel Food and Beverage), drink their beer (San Miguel Brewery), and live in their homes (San Miguel Properties).

In Q1 2025 alone, SMC reported a net income of P43.4 billion. But just recently, San Miguel borrowed more than $23 million (about P1.3 billion) from its $2.165 billion loan facility to continue land development works for its New Manila International Airport in Bulacan.

Why does such a rich and successful corporation need to borrow money to build its projects? Why not save up money so that it has cash on hand to fund this — much like how you and I might save up for a home renovation project? Does it mean the company doesn’t actually have money to pay for a project it wants?

The short answer is no, borrowing isn’t a sign of weakness. Oftentimes, it’s a deliberate strategy to answer the central question of corporate finance: where do we get the money from?

Why not save up for projects?

We first need to change how we view loans, from a consumer perspective to a business perspective. For individuals and households, debt might feel like a burden or a last resort. But for a business, loans aren’t scary.

Anything you do to expand the business will likely require funding, whether that’s opening another restaurant branch or building a multi-billion airport. Now, the business must figure out two things: where do they get the cash, and what is the most efficient way to get that cash?

To answer the first question, a company could technically save up funds over time. In fact, this is how many small family-owned businesses operate. A town bakery might save profits for years to open a second branch.

But things begin to change when you scale up to the kind of megaprojects that large corporations pursue. Waiting years to build up your war chest for a multibillion-peso project can mean years of delayed operations, foregone profits, and lost competitive edge. And, in the meantime, the cash that you’re saving up, sitting idle in bank accounts, loses value to inflation and misses investment opportunities.

The second question is also important because a business like SMC might certainly be able to finance many of its projects from retained earnings, or the profits that it saved from previous years. But remember that things like net income and retained earnings are really just accounting concepts — meaning all that money might not be readily available, liquid cash that they can easily deploy for projects. For a huge conglomerate like SMC, that money might be spread across multiple subsidiaries, each with their own plans, earmarks, and budgets.

Why not use equity?

That generally leaves two fundraising options: issue equity (like offer more shares of the company) or take on debt (like loans and bonds).

At first glance, equity might seem like the safer and more flexible option. After all, there’s no interest to pay. Why not offer more shares to the public or to investors in exchange for capital? It sounds like free money.

Well, no — there’s no free lunch in business, remember. In fact, you could argue that equity is more expensive than debt. When a company raises money through debt, they’re essentially attracting investors in the company. And these investors often expect a much higher return than what banks or bondholders require for their loans.

That’s because equity investors take on more risk than lenders. When a company borrows from a bank or issues bonds, those creditors have priority if something goes wrong. In a bankruptcy, the law is on the side of lenders. Banks, other creditors, and suppliers are repaid first. Meanwhile, equity holders are last in line. If there’s nothing left after everyone else is paid, shareholders can lose 100% of their investment. That’s why equity investors demand higher returns to justify that risk.

While a large, stable firm might be able to borrow at 5% to 8% interest, equity investors often expect much higher, perhaps in the range of 12% to 20% in returns, either in the form of dividends or future capital appreciation.

And finally, there’s the matter of control. When you issue new shares, you dilute ownership. Every round of equity fundraising chips away at the original shareholders’ stake in the company. Founders or family members are surrendering their stake and power in the company to outsiders. Having more voices in stockholder meetings could mean more competing views on strategy, risk, and return timelines. As ownership fragments, it could get in the way of quick decision-making and long-term planning.

And remember, unlike debt, which disappears after it’s repaid, equity is permanent. Once shares are issued, they’re out there — unless the company buys them back, which can be costly and complicated.

Now you can see why some companies load up on debt to avoid all the strings attached with equity. And not only that, but loans can help them save on taxes and magnify gains, which we’ll find out in the second part of this story. – Rappler.com

Finterest is Rappler’s series that demystifies the world of money and gives practical advice on how to manage your personal finance.