For a small business or a large company, there is always a need for sources of debt financing for entrepreneurs. It is observe that sole proprietors usually look for sources of internal debt financing. Whereas small business owners prefer towards sources of short-term debt financing. Similarly, large companies usually prefer for sources of long-term debt financing or source of external debt financing options. These financing options are usually chosen to finance working capital requirement for an organization.
Sources of Debt Financing:
Debt financing is the second best sources of finance for a company to meet the financial requirements. Here are will see some of the sources of debt financing for small business and for business expansion which can be preferred for various requirement like short-term financing, long-term financing, internal financing or external financing.
1. Bank Loans:
Bank loans are the most widely recognized method of debt finance for an organization or a business. Organizations raise a fund from commercial banks by keeping some security as a guarantee against the bank loan. Bank loans are for fixed period and business needs to pay installments regularly. This can be one of the better sources of debt financing for large companies. Bank provides three types of loans short-term loan, long-term loan, intermediate loan according to the requirements of the business.
2. Trade Credit:
A course of action in which the business can buy the products now and pay them later is called as Trade Credit. This is one of the sources of debt financing for shorter time period. This is one of the best sources of debt financing for startup companies as they can’t stand to get bank loans by providing security as guarantee.
3. Purchasing on Installments:
Buying goods on installments is one of another sources of debt financing. Buying on installments involves buying assets benefit as well as making installment in pre-decided installments. The purchaser needs to mortgage his assets until the point when full settlements of payments are made. In case when a business account is operating at highest credit rating. Business might not need to mortgage any assets. This facility of installment purchases is given by Banks, Commercial Lenders, or any Financial Institutions or investors to the business.
4. Asset Lenders:
Those lenders who fund organizations by means of loan to the business for buying any assets are known as asset lenders or asset specialized lenders. The business consequently needs to mortgage its assets, for example: accounts receivables, stocks, inventories, etc. This is one of important source of debt financing for large companies. This option of debt finance is valuable for organizations that have large amount of account receivables, stock, land, etc. that can be mortgage to lenders.
Those business or companies which are well established and requires fund for growth for them Bonds are the best sources of debt financing. The business or companies can raise finances by selling their own bonds to open market which can be purchased by different buyers and sharing benefits on the activities for which bonds are issued. For examples: a company can issue a bonds as “Infrastructure Development Bonds” and a state or country can issue a bonds like “Road Transportation Development Bonds” with better interest rates than the banks saving or fixed deposit rates to attract buyers or investors.
6. Insurance Agencies:
Insurance agencies or companies are another major sources of debt financing to small business or startup companies. They normally offer 2 types of loans i.e. Policy Loan or Mortgage Loan. A policy loan depends on the measure of cash that is paid as a premium on the protection policy. On the other note, a mortgage loan can be opted by mortgaging any assets of the organization. Then again, arrangement credit depends on the measure of cash that is paid as a premium on the protection approach.
These are few debt financing sources. There are numerous more debt financing instruments are accessible and available in the market. The business can choose any prospects after figuring out which source suits them the best. Need for different sources of debt financing will keep on increasing rapidly with the growing numbers of start-ups as well as small businesses.
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Basics of Debt Financing and Equity Financing for Beginners
- Chapter 1: What is Debt Financing with Examples?
- Chapter 2: Types of Debt Financing
- Currently Reading: Sources of Debt Financing
- Chapter 4: Advantages and Disadvantages of Debt Financing
- Chapter 5: What is Equity Financing with Examples?
- Chapter 6: Types of Equity Financing
- Chapter 7: Sources of Equity Financing
- Chapter 8: Advantages and Disadvantages of Equity Financing
- Chapter 9: Debt Financing vs Equity Financing – Advantages and Disadvantages
- Chapter 10: Debt Financing Quiz – Equity Financing Quiz - Questions and Answers
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