What is debt funding?
Debt Financing means when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors.
Index
- Debt
- Various sources of debt funding
- Friends and relatives
- Banks and financial institutions
- General public & bonds
- Term loans
- Bond and debentures
- Conclusion
- FAQs
Debt
Debt is a liability for business as the business has to pay back that. It is mainly, provided by banks and nbfc. Debt funding is one of the best ways of funding
This is due to several benefit offer to an Investor by that over equity
The comparison between debt funding and equity funding are:-
Comparison between debt funding and equity funding
- Equity
Dilution of ownership in equity funding dilutes ownership whereas in debt funding ownership is not digested number one dilution of ownership.
Inequity funding dilutes ownership takes place whereas in debt funding it is not possible. - Voting right
Voting rights in equity funding the shareholders have voting rights whereas the lenders do not have voting rights if we take that funding.
- Reward
Reward the shareholders are not entitled to any fixed periodic payment but are entitled to get dividends only.
If identities are able to earn profits whereas lenders get interested on a regular basis even the company is making profit or loss. - Collateral
Collateral in equity funding there is no need to provide any Collateral whereas in debt funding we have to give Collateral like are assets.
- Tax
Tax benefit in equity funding a company does not get any type of tax benefit
Whereas If a company takes that funding the interest which is paid to the lender is eligible to deduction of income tax therefore, the company is able to get a tax benefit.
Various sources of debt funding
Like equity that can also be racing either through formal or informal sources
Informal sources of debts
It is mainly, refers to debts from a friend and relative and regulated financial market.
formal sources of debt are mainly, refer to the raised from Bank financial institution large capital firms.
Friends and relatives
At the initial stage, a Startup gets difficulty in raising funds
So, the entrepreneur has to take loans from friends and relatives so that they can get initial Investments.
However, while executing the transaction the same procedure should be carried out.
In the same manner in which it should be done when a third party is giving loans to us
So that in the near future there are no conflicts on interest rates.
Banks and financial institutions
Banks and financial institutions are the most appropriate source of obtaining debts.
The sources are hard to come by in the initial stage of the business as almost all banks and financial institutions look for a strong business plan.
A positive track record Collateral security for guaranty Excel at the initial stage of a business none of the above is easy for entrepreneurs.
However, there are some Institutions that provide support to micro small and medium enterprises.
Microfinance institutions, help them to get loans at cheaper rates and help them to grow and get finance easily without collateral sometimes they give interest-free loans.
So that the business can grow and it can generate employment in a fast developing country like India non-banking financial companies (NBFC) play a very important role.
NBFC
Nbfcs are companies that are not a bank and our principal engage in the business of financial assistance over the years the number of Nbfcs in India has increased at a very fast rate.
Some of the factors which make Nbfc are different from banks are unlike banks Nbfcs are not allowed to accept demand deposit.
Nbfc is not a part of the payment and settlement system of the country.
Nbfc cannot issue cheque drawn on itself this is because they are not part of the payment and settlement system of the country.
The deposits accepted by Nbfc are not subjected to deposit insurance and deposit insurance and guarantee Corporation and like the banks.
The Nbfcs can be classified into several categories based on the nature of business carried out by the company
They are an asset finance company, infrastructure financial company, loan company, investment company, Infrastructure debt fund, microfinance institutions, factoring companies
General public & bonds
WhatsApp business moves on the next level entrepreneurs can export this option as well as a business can rice front from the public by way of issue of bonds and debentures
Only if it is a company in case of bonds issued to specify the interest rate the due date of interest payment and maturity date
It is on the maturity date that the issue has to pay back the principal amount and only has to pay the interest during the entire tenure.
Sensor company has to pay back the principal amount only the maturity date It allows the company to enjoy all the funds throughout the period and repay only after successful utilization of funds from the investors perspective
Term loans
Term loans are credit facilities taken by a company for a fixed term which is repaid when maturity date comes
Term loans are generally given by banks and big Institutions these banks and big institution gives loans on the basis of interest
These laws are provided when a company has a good Collateral and asset and creditworthiness of the company is good in the market term
Loans can be classified into two:-
Short term and the long term usually companies take.
A short term loans for less than one year so that they can meet their working capital
A long term loan is a loan which is paid and taken for more than five year
Usually, long term loans are taken to invest in machinery land of fixed assets.
Term loans are given by banks in return they get a fixed rate of interest from these companies against the loans.
If a company fails to pay the loan amount.
Then Bank can sell its Collateral and get the remaining amount back
Usually, these loans are given to well settled and well-reputed companies for example Reliance, Tcs, ITC.
Bond and debentures
Bonds and debentures are security acknowledge a debt.
In a market like India the meaning the two you are inter exchangeable but in a nation like the USA
They are refer to as different types of debentures instruments.
In the USA, bonds are called secured assets.
These bonds are issue by the issuer to get funds from the general public.
On the other hand, debentures are not secure by the assets of the issue of but by the general credit of the issuer
Bonds and debentures can be classified into the following ways:-
Classification on the basis of transferability based on transferability
Bond’s and debentures can be freely Transferable or non- Transferable
Most of the bonds and debentures are Transferable
This means securities can be transfer by the subscriber to any other person easily giving the lender subscriber liquidity.
Classification based on tenure bones can be either short term in nature or long term
In nature, short term debentures are those which are up to 12 months.
Whereas long term debentures are those which are more than 12 months.
The short-term debentures are issue to meet working capital.
Long term debentures are issue for a purpose of investment.
Conclusion
Debt is a liability for business as the business has to pay back that.
It is mainly, provided by banks and nbfc. Debt funding is one of the best ways of funding
FAQs
Debt funding is the process in which an investor lends money to an entrepreneur for their business needs for a certain period at a given rate of interest. … Equity financing or venture capital (VC) funding, on the other hand, doesn’t require the startup to pay back the money invested.
Alteria is India’s largest venture debt fund focussed on startups that also have strong VC backers.
It has invested in almost 20 companies including Stanza Living, Dunzo, Universal SportsBiz, ZestMoney, Vogo, Country Delight and Toppr among others.
Funded debt is a company’s debt that matures in more than one year or one business cycle.
This type of debt is classified as such because it is funded by interest payments made by the borrowing firm over the term of the loan.
Funded debt is also called long-term debt since the term exceeds 12 months.
There are various types of funds, chief among these are equity funds and debt funds.
The difference between the two comes from where the money is invested.
While debt funds invest in fixed income securities, equity funds invest predominantly in equity share and related securities.
