{"id":33301,"date":"2021-12-24T05:35:13","date_gmt":"2021-12-24T05:35:13","guid":{"rendered":"http:\/\/staging.hsmi.london\/?page_id=33301"},"modified":"2022-07-26T05:38:18","modified_gmt":"2022-07-26T04:38:18","slug":"debt-financing","status":"publish","type":"page","link":"https:\/\/hsmi.london\/en\/activities\/debt-financing\/","title":{"rendered":"Debt financing"},"content":{"rendered":"

WHAT IS AND WHY DEBT?<\/strong><\/h3>\n

When a company resorts to debt financing, it means it gets the cash it needs from other businesses or sources, incurring a debt to the original lender for either short-term needs or long-term capital expenditures.<\/p>\n

Debt financing is when the company gets a loan, and promises to repay it over a set period of time, with a set amount of interest. The loan can come from a lender, like a bank, or from selling bonds to the public. Debt financing may at times be more economical, or easier, than taking a bank loan.<\/p>\n

Whether a loan or a bond, the lender holds the right to the money being loaned, and may demand it be paid in full with interest under the conditions specified by the borrowing agreement.<\/p>\n

Company owners reap more benefits from debt financing than they do from issuing stock to investors. Issuing stock results in a dilution of the owner\u2019s ownership interest in a company.<\/p>\n

Also, the lender is entitled to only repayment of the agreed-upon principal of a loan, plus interest, and can have no direct claim on future profits of the business \u2014 the way an investor would.<\/p>\n

Except on occasions where variable-rate loans are used, the principal and interest are known amounts and can be budgeted. Interest on the debt can be deducted on the company\u2019s tax return \u2014 reducing the actual cost of the loan.<\/p>\n

Lastly, by borrowing money from lenders rather than issuing ownership shares (stocks), the company isn\u2019t required to comply with state and federal securities laws or rules, and doesn\u2019t have to send mailings to large numbers of shareholders, hold meetings with them, or seek a vote before taking certain actions.<\/p>\n

SHORT-TERM VS. LONG-TERM DEBT<\/h3>\n

Long-term debt financing<\/strong>\u00a0involves multi-year repayment terms, while a short-term loan gives a company quick access to capital \u2014 sometimes even in as little as 24 hours.<\/p>\n

Regardless of its purpose, the amount an owner plans to borrow is likely the most important factor. After that, another factor is the term length of the loan. The decision between a short-term and long-term loan will affect everything from the amount of interest paid over time to how much a lender will actually risk<\/p>\n

All loans involve risk. The amount of risk is often what influences the rate of interest, as well as the term of the loan.<\/p>\n

Short-term loans<\/strong>, which are usually smaller amounts\u00a0than long-term loans, tend to have higher interest rates than long-term loans, but long-term loans accrue more interest because the borrowed money is financed over a longer period of time. Also, short-term loans are a better way to overcome a momentary liquidity problem or financial setback, compared with taking a larger, longer-term debt obligation.<\/p>\n

Long-term loans can involve multi-year repayment terms that can even last decades.<\/p>\n

For this reason, while short-term loans may have higher interest rates, companies with long-term financing tend to pay more in interest because they are borrowing for a longer period of time.<\/p>\n

Also, many lenders, like larger banks, have stricter lending standards for longer-term loans.<\/p>\n

TYPES OF MAIN DEBT FINANCING:<\/h3>\n

Bank loans:<\/strong>\u00a0The most common type of debt financing is a bank loan. The lending institution\u2019s application rules, and interest rates, must be researched by the borrower. There are lots of loans that fall under long-term debt financing, from secured\u00a0business loans<\/a>, equipment loans, or even unsecured business loans. What most such loans have in common is the lender expects you to promise some security or assets \u2013 collateral \u2013 to indicate the loan will be repaid even if cash to repay it doesn\u2019t exist in the future. That\u2019s what is required for a \u201csecured\u201d business loan \u2013 repayment is guaranteed by putting collateral forward as \u201csecurity.\u201d A secured business loan often has a lower interest rate, because the lender accepts the collateral securing the loan. An unsecured business loan requires no collateral, but does require a \u2018financial assessment.\u2019 The lender may also want to see a specific income for a set period of time to be assured you have the ability to repay the loan. Unsecured business loans also usually are not given for a period greater than 10 years.<\/p>\n