The business decides to issue bonds to raise money to pay off bills and restock products. Say a high street chain is having cash flow problems, with its capital tied up in stock and a £10,000 shortfall in a given month. To put it simply, think of debt financing as a loan. Should the company go bankrupt, lenders and bondholders are prioritised over owners and existing stakeholders when receiving liquidated assets, so settling outstanding debt on time is critical. The value of the investment, the agreed interest rate and the payback time – known commonly as the principle – are stipulated in a ‘debt finance contract’ and must be paid at the agreed future date. When a company issues a bond or note, those that purchase them become the investors and the money raised from transactions is used by the company as short-term, expendable capital. For example, bills, bonds and notes are the most common fixed-income products sold to investors to generate cash flow. Most methods involve selling fixed-income products to generate capital. Many business owners choose the debt financing route and try to steer clear of equity financing to prevent conceding business ownership.Ĭompanies can choose which method of debt financing to offer. They can take on debt and pay it back later with interest, sell equity in the business – giving the investors ownership in the form of a stake – or a blend of the two. When a company needs to generate quick cash, there are three popular ways they can go about it. Businesses that fall on hard times, are situated in industries with low day-to-day cash flow (such as international trade with delayed payment terms), or are looking to make a substantial move – like a merger or acquisition – can benefit from debt financing when needed.
There are many reasons why businesses take on debt to access liquid capital. Typically, the funds are paid off with interest at an agreed later date. Debt financing – also known commonly as debt funding or debt lending – is a method of raising capital by selling debt instruments, such as bonds or notes.
0 kommentar(er)
