If you follow business and economic news, you would have come across multiple reports of companies raising ‘debt.’ But what does ‘raising debt’ mean? And why is it an essential ingredient for enterprises?
Debt is the amount raised from investors, banks, NBFCs, financial institutions, etc. The process of a company raising debt to streamline its business operations can be understood as debt financing.
The importance of debt financing
Debt financing can be both secured and unsecured, where collateral may or may not be important.
Here are the top 5 benefits that enterprises enjoy when they say yes to debt financing when in need.
- Affordability: Raising debt is an affordable way of mobilising funds for business growth vis-à-vis unorganised forms of debt or equity.
- Retain ownership: Raising debt is a great alternative to giving away your company’s equity to investors in exchange for funds.
- Financial discipline: Raising debt promotes judicial use of the funds raised in addition to the responsibility of working towards larger goals to repay the debt.
- Multiple options: Enterprises have multiple options to mobilise debt; there are multiple lenders and multiple debt products to suit the requirement of enterprises.
Educate yourself about the right product that best fits your needs. And because knowledge is power, it is critical to boosting your understanding about the investment market by using the right resource that educates and informs investors. Tickertape is a wholesome culmination of technology and information that spearheads this mission of making personal finance and investor education widely available in the country.
Raising Debt is Not Easy: Challenges
Enterprises often face rejections despite having killer products or services, great financial numbers in the past, a good credit score, and/or a highly convincing business plan.
Lack of clarity, choice of the right product, ability to support evaluation, and choice of the right partners are some of the common problems faced by enterprises.
The Must-Know Tips While Raising Debt
Now that you know the kind of challenges enterprises may face while raising debt, here is a checklist you can keep handy to raise debt efficiently:
Formulate a business plan that is scalable
A business plan will help your enterprise and the investors plan for organic/inorganic growth, mergers & acquisitions, and then underlining the financial requirement to do the same. This will help both the enterprise and the investor understand how much money the company needs, and how they plan on returning it back.
Know what debt you need
There are multiple types of loans (asset-backed loans, corporate debt, term loans, vendor invoice financing, or simply a line of credit). Having clarity on the type of credit your business wants to pursue will help attract the best deals.
Find the correct partner
Understand what venture capitalists (VC), firms, and financial institutions have been asking for.
Assess all obligations
When liasoning with an investor to raise debt, ensure that your enterprise has crystal clear clarity on the compliance, fees, and repayment guidelines. Understand whether the interest rate offered to you is flat or reducing to be able to make the best-informed decision. Ensure that there are no blurry lines when it comes to repayment timelines.
One of the most efficient ways for enterprises to source and quickly secure debt financing is through leveraging information and technology. Yubi is India’s largest corporate debt platform, facilitating easy financial access for enterprises.
To read the full article and understand debt financing better, visit the Tickertape blog.