Debt Financing
Debt refers to capital that is loaned by a lender to a borrower, who is in
turn obligated (1) to repay the original amount loaned--or the principal--within
a specified time period, and (2) to pay interest on the principal.
In fact, you are probably more familiar with debt capital than you think. Common types of debt include credit cards and mortgages.
How do you know if debt capital is for your
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While the terms under which the loan agreement is made
are often in writing and are legally enforceable, lenders seek to protect their
investment by lending debt capital only to those entities which demonstrate the
ability to repay it at a desirable interest rate. In some cases, lenders further
protect their investment by offering secured debt capital. If secured debt
capital is not repaid according to the agreed terms, a lender may have the right
to take possession of the securitized assets--or assets that were promised to
the lender in the event that the loan was not repaid.
Therefore, debt
capital is most appropriate for those companies that can demonstrate stable cash
flow and/or those companies that have a significant asset base.
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| What are the types of debt
capital? |
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Debt capital ranges from credit cards and lines of
credit to bank loans and high yield debt. The type of debt that is best for your
company depends on many factors. For example, relevant factors include the
amount of capital your company needs, the size of your company, and the
financial state of the company (including the existing capitalization of the
company, or how your company is currently financed).
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| Where can I find debt
capital? |
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Depending on the type of debt your company seeks, there
are numerous sources of debt capital, including commercial banks, credit unions,
the government, credit card companies, community organizations, and specialty
finance companies.
Back to Sources of
Capital.
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