![]() Debt payments are often tax-deductible, unlike other forms of raising funds.It is a great way to leverage a small amount and use it to generate a much larger amount from business operations.Hence, debt financing can be good or bad, depending on how the debt is used, treated and serviced. Bonds – these are generally long-term loans that are backed by collateral.Īdvantages and disadvantages of debt financingĭebt financing is a great way for a business to leverage a small amount and generate a large amount by investing the same in business operations.Debentures – these are long or short-term loans that are not backed by any collateral but rely on the creditworthiness of the borrower/issuer.Bank/NBFC loans – these are typically term loans, the most common form of debt financing.Cash flow loans – an unsecured loan which is used to meet a shortfall in working capital.Revolving credit – type of credit facility that allows a borrower to borrow money, use it to fund the business needs, repay it and borrow it again whenever required.Installment loans – these are regular term loans, that are borrowed from a bank or NBFC and repaid in EMIs.Unsecured - loans that do not require collateral.Secured – loans that require collateral.Some of the common ways of debt financing are mentioned below: Based on the collateral requirement: There are different variations in which debt financing can be classified. The borrower needs to find a lender (or a suitable instrument) that charges an affordable rate of interest. Rate of interest – the rate at which the borrower will return the loan amount, in the form of an interest payment.The tenure needs to be comfortable – neither so long that the borrower gets into a debt trap nor too short that the EMI amount is too high. Tenure – the duration for which the loan is being taken.This needs to be calculated by the borrower based on the requirement and affordability. Loan amount – the amount which is being borrowed.The borrower (a company in this case) applies for the loan either from a bank, NBFC or the general public. How does debt financing work?įor the borrower, debt financing works just like a regular debt. You need to check the duration for which you need the funds, the cash flows generated from these funds, etc. ![]() ![]() Hence, it is a prudent practice to check certain things related to your business before you decide on debt financing. This is done through the issuance of bonds, commercial papers, debentures, etc.ĭebt financing involves the raising of funds from a lender and paying back in EMIs. While we generally think of only banks and NBFCs as the source of debt financing, companies raise funds from the general public as well. What is debt financing?ĭebt financing is the process of borrowing money from a source (often a bank or a Non-Banking Finance Company – NBFC or even the general public) with the commitment to pay it back with interest, within the specified tenure at the pre-decided rate of interest. In this article, we shall understand what debt financing is, followed by how it works and the pros and cons of the same. ![]() It is quick, easy and has the least hassles. Debt financing is one of the most common methods of financing a business. At such times, the business uses one or the other methods to raise funds. A firm (business or professional practice) often needs funds to continue with its business operations or bridge a small gap in its working capital. ![]()
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