Question

You are a finance manager for the company JKL Limited based in the US. Your CFO comes to you and tells you that you intend to make a debt funding for a new 5-year project in Austria. Since he is not very familiar with such a funding, he tells you that he has heard of different aspects or variables of such a funding. Please name those and explain briefly.

Answer 1

VARIOUS ASPECTS OF DEBT FINANCING

1. Loans
2. Trade credits
3. Installment purchase
4. Assets bsed lenders
5. Bonds
6. Factoring

LOANS

Loans are the most common and popular mode of debt finance for a company. Businesses borrow money from commercial lenders like bank by keeping some collateral security against the loan. Loans from banks and other commercial lenders are for a fixed period and business needs to pay regular interest for it. The loans can be for short, intermediate or long-term depending upon the financial requirements of the business.

TRADE CREDIT

Trade credit is an arrangement in which the business can purchase the goods now and pay for them later. This way the business can avail debt financing for short term. Trade credit is a good mode of finance for startups as they cannot afford to obtain loans of the higher amount by placing a collateral society.

INSTALLMENT PURCHASE

Purchasing the capital goods on installment is another type of debt financing. Installment purchase comprises of buying an asset and making payment in pre-determined installments. The buyer has to mortgage its asset until full payment of installment is made. A business that has higher credit rating may not have to mortgage any asset. Banks and finance companies provide the facility of installment purchase to the business.

ASSET BASED LENDERS

Asset-based lenders are those finance companies that lend money to the business for purchasing the assets. The business in return has to pledge its assets like inventory, accounts receivables, etc. This type of debt financing is very useful for businesses that have higher inventory, account receivables, real estate or any other asset that can be pledged.

BONDS

Bonds are a source of debt capital for businesses that are well established and need funds for long-term growth of the business. The company can raise funds by selling bonds to different buyers and sharing profits on the projects for which bonds are issued.

FACTORING

Factor purchases the accounts receivables of the companies. In factoring agreement, the business gets the timely flow of money and does not have to wait for the customers to pay them. In return, the business has to pay the factor a certain fee or commission. Factoring is of two types i.e. recourse factoring and non-recourse factoring. Based on the need and requirement, the business can opt any of the suitable financing facility.