Question

What are the major types and uses of debt financing?

Answer 1

Debt Financing less costlier than equity financing and often we find easier to acquire, but becouse debt financing represents a fixed obligation in term of interest and repayment,it increases the risk of the firm.Debt is a nasty word to a lot of people however in business it is considered of the best method for financing of an asset. in short we can say that in some ways debt is preferable over equity finance becouse when you borrow money you don't have to give up your ownership over company.

Types and uses  of Debt Financing

1. Bank Loan-One of the most common type debt is bank loan,many businessman commonly borrow money from friends and relative.but commerial lender are also option if you have collateral to give for the loan.The institution application rules and interest rate most be fair to be any loan taken for. Bank loan can be classified as Long term bank loan aur short term bank loan based on their life and repayment cycle.

2.Bonds-small business dont give much thought about using bond as debt finance to raise money for long term investment however its an option to keep in mind for down the road and once the firm is establish and need huge capital to grow. Local goverment many have bond programs in which municipal bond can be sold to finance smaller business' capital project to be paid off with money generated by these project.

3. Installement Purchases-A business that takes mortgage on a building,buy a vehicle with car loan or purchase an asset with dealer finance is doing nothing more than but aquiring debt finance-a bank or finance company or actaul seller of the asset is fronting you the money to buy the asset. For new business purchase of an asster entirely depend upon owner's personal credit rating and a mature business which has built a solid credit rating of its own does not require owner for financing any debt.

4.Debenture-Debenture is another type of Bond issue but is an unsecured loan certificate issued by the company,a debenture is backed up the general credit rather than specific Assets.