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Debt financing basically refers to means by which entities can access credits. These credit lines are obtained on conditions based of what kind of debt one needs to obtain. Types of debt financing for businesses show assesments are then carried out by the institution giving out the debt. An example is that of more established businesses who can access the conventional bank loans because they tick all the requirement boxes, while on the other hand smaller entities and individuals have to sort for other lines. These reasons, I think, would make an interesting topic for discussion, especially in USA where the business space is dominated by Large, Small to Medium Enterprises (SMEs).
However I shall not digress from what we reay want to look at for the purposes of this article. Let us interact with these types of debt financing. Hopefully by the time we with types of debt financing for businesses finish this ride through debt financing types, you will know which one is accessible to you.
1. Loans From Financial Institutions
Well this is one of the oldest and most common types of debt financing. These have become so difficult to access for small businesses and even individuals such that some nolonger have regard for this type. Fact remains it sti is a recognised type of debt financinh, if not the most popular. One point not to miss is the fact that loans from financial institutions are more accessible in developed countries compared to tge third world.
Whoever wants to access loans from financial institutions are mandated to follow a strict set of requirements. Most of them have been mentioned earlier in this article, though there are more. We should also be cognisant of the fact that this set of requirements differs depending on which part of the world you are and also which financial institution you choose.
2. Non-Bank Cash Flow Lending (NBCFL)
Non-Bank Cash Flow Lending works almost the same as conventional loans where banks evaluate companies for eligibility, by analyzing quite a wide range of factors, from credit history, investment history, assets, and profit. With NBCFL, loans are approved based on a much narrower set of factors.
When a company applies for an NBCFL, its cash flow (as opposed to assets) is the determinant for loan viability. Despite the set of factors being quite smaller this tima, important facets like transaction frequency, seasonal sales, expenses, customer return rates, and online reviews can also be used to decide whether the company in question qualifies for the loan by following types of debt financing for businesses .
3. Recurring Revenue Lending
This is a special type of debit financing designed for businesses only. Individual can not be eligible for this one. Also known as SaaS (Software as a Service) credit, Recurring Revenue Lending is where by companies are funded based on their monthly recurring revenue which is the determinant of how much an entity can access. MRR loans are favourites of emerging businesses because of their flexibility. The my can be borrowed and paid whenever needed and do not attract interest if nothing is borrowed.
Businesses that have a large customer base could benefit a great deal from MRR loans because the returns from that base translates to more accessible funds of this sort. Like loans from financial institutions, a set of requirements is needed also for MRR loans before a company is regarded as an eligible entity.
4. Loan From a Friend or Family Member
Yes this is also a type of debt financing! Many are the times we have seen businesses being started by loans from friends and family, and these have flourished into large corporations. These loans usually come with much flexible terms depending on the agreements made between the lender and borrower. Look at how these loans come with, if any will apply, lower interest rates among other factors like less paperwork. These conditions sound flawless yet the implications involved can more than just reputations.
Family loans are not only used to start businesses, but also other various reasons. A piece of advice before taking a family loan is, do a thorough self evaluatio as an individual or company to see whether you really have to take one and your ability to pay it back. Most people do not come clean with friends and family about the risks involved in them investing in, or extending that hand to them
5. Peer-to-Peer Lending
This is new version or as some mY want to call it, an alternative to the family loan. The internet is responsible for Peer-to-Peer, through sites like KickStarter, and GoFundMe. These sites match companies with lenders that have confidence in their operations.
6. Home Equity Loans & Lines of Credit
If you are familiar with mortgages then it is easier to understand this type of debt financing where the borrower has to have real estate equity and good credit, which make it easier to secure a home equity loan. Repayment of this loan is done at a fixed monthly rate which does not really change unless in the case of inflation which can see these installments being reviewed.
Home and equity loans come with high interest rates here’s expert information about these, “Alternatively, a home equity line of credit allows borrowers access to a set amount of cash that they can optionally draw from whenever needed. Interest isn’t charged until funds are withdrawn; however, the interest rate charged may be variable depending on the prime rate.”
As I mentioned earlier in the article, reasons around the reason why it is difficult for SMEs and individuals to access conventional bank loans, will be a good basis for another discussion. Therefore, I choose to use my conclusion in bringing you to light, lest we may not get a chance to interact with these indepth.
Financial institutions are quite inscure about lending money to SMEs and individuals. This has been the atmosphere since the world recession faced in the 2008 period. Investment banks prefer lending larger and established companies who have a wide range of collateral through these types of debt financing for businesses. The upside is there are other sources where people can get credits and those have moderated the situation over the years.