debt financing kamal deep

8/3/2019 Debt Financing Kamal Deep

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Kamal deep choudhary


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` Debt borrowing money from an outside source withthe promise to return the principal, in addition to anagreed-upon level of interest.

` Debt is also referred to as leverage in finance.

` In contrast equity financing does not have to berepaid.

` The interest rate reflects the level of risk that thelender undertakes by providing the money. Debt

financing entails less risk than equity financing, thusitis usually cheaper.


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Pre-launch

Start-up G

rowt

h

Transition

E

xit/Succession

Life Cycle of a Business Venture

Bootstrapping

Self, Friends and Family

Equity Financing

Debt Financing


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` Maintained ownership allows the founders to

retain ownership and control of the company (in

contrast to equity financing).

` Greater degree of financial freedom provides

business with a greater degree of financial

freedom than equity financing as

debt obligations are limited to the loan repaymentperiod, afterwhich the lender has no further claim

on the business.


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` Easy to administer lacks the complex

reporting requirements accompanying some

forms of equity financing.

` Tax deductions interest payments can bededucted from business income taxes (lower

interest rate).

` Less expensive tends to be less expensive

over the long term than equity financing.


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` Repayment shortages in CF may makeregular payments difficult (incl. penalties, taking

possession of collateral etc.).

` High rates interest rates vary with

macroeconomic conditions,the borrowershistory with banks, business credit rating,

personal credit history.

` Impacts borrowers credit rating debt

increases leverage,failure to make paymentsadversely affects business creditrating and its

ability to obtain further financing


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` Cash and collateral necessary to make sure

the business will be generating sufficient CF, it is

asked to put up collateral on the loan.

` vailability limited to established businesses it can be difficult for unproven businesses to

obtain loans, the amount of money SMEs may be

able to obtain via debt financing is likely to be

limited, so they may need to use other sources offinancing as well


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` Expected to be paid within one year

` Most often used to finance short-term

expenditures such as inventory, supplies, payroll,etc.


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` Banks

` Asset-based lenders

` Factors


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` Beyond one year

` Most often used to fund fixedasset purchases


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` Banks: term loans

` Leasing companies

` Real estate lenders


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debt financing kamal deep

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