Sources of Debt Financing
Businesses need financing for several reasons. Many times they cannot afford large investments with their current cash flow or need outside financing to expand their business operations. The amount of financing is determined by business size, financial health and type of projects.
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Credit Lines
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Credit lines are a debt financing tool used by many businesses for short-term needs. Most credit lines do not carry favorable terms for long-term financing and should not be used for large outstanding balances. Inventory purchases, short-term cash flow needs and payroll are the types of debt financing most used on business credit lines. Once sufficient cash comes in from operations, the credit lines are paid off quickly.
Bank Loans
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Bank loans can be for several business purposes: equipment, buildings, or vehicles are the common purchases. Most major capital expenditures will require long-term bank financing because businesses do not want to tie up their operating cash. Banks will grant loan terms based on the type of loan, and if the loan proceeds are going to generate future cash flow and higher returns for the company.
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SBA Loans
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Small and medium businesses may qualify for government loans through the Small Business Administration (SBA). The SBA helps smaller businesses obtain debt financing because the businesses do not have proven track records of current operations. Government grants are also offered through the SBA for qualified businesses.
Bonds
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Large companies can issue corporate bonds as a way to obtain debt financing. Bonds may be issued through an exchange or broker to the public. Some bonds are purchased by investment firms depending on the issuing company's bond rating. Business operations are a critical part of issuing bonds. Outside agencies rate company's bonds based on the company's ability to pay out their bonds; a low bond rating will dampen the option of bond issues.
Private Loans
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Outside investors finance operations with debt. Some investors require less information than banks because they are more willing to accept risk than banks. Investors will need financial information regarding current business operations and how their money will improve the company. Some companies are able to line up several private investors to fund one large investment project.
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