The New Perspective of Debt Funding

Debt financing is a form of capital offered to new businesses for a certain period of time by an investor or lender who could be a bank, NBFC or private lenders. In debt financing, the startup takes out a loan and repays the principal plus interest

If you had to choose between debt funding and equity financing, which would you choose and why?

Debt financing, on the other hand, is the polar opposite of private equity funding or venture capital funding for early stage businesses but is nonetheless crucial to the launch of a business.The primary benefit of equity financing over debt financing is that there is no need to repay the money borrowed (rather you pay back the cost of the shares at a later date). A startup can raise money by selling an ownership stake in the company to investors. Sometimes, investors will have a say in how the company is run in addition to having a financial stake.

To obtain debt financing, on the other hand, debtors need not provide equity or a stake in the company. As long as payments on the financing are performed as per the financing contract, the lender has no ties to internal business choices and the debt financing serves as credit.

Why Use Debt Funding?

Debt financing exists primarily to help young companies buy more time in between equity funding rounds. In order to help you make the best decision for your business and financial circumstances, we have included some of the most prevalent benefits and drawbacks of debt financing below.

Pros of Borrowing Money

What advantages do you see debt financing having for new ventures? There are a number of reasons why it could be a good funding option:

• Debt financing, in contrast to equity financing, does not dilute the ownership stake of the company's founders. For young companies that have reached a point where they want to keep some of their stock but no longer want to spread it around, this is a huge benefit.
• The lender has complete discretion over all operational matters; this is due to the absence of any equity interest in the company on the lender's part. When a startup receives debt financing, it maintains the same level of control it did previously. Without having to get approval from the lender, the firm can utilize the money anyway it sees fit. These funds are typically used to finish a certain campaign or project, buy equipment or inventory, or speed up the growth of a particular effort, all of which are common uses for startups.
• Time frame that has been specifically defined: Debt finance is limited in duration compared to equity financing, which may be permanent. Once the startup has repaid the loan within the agreed upon time frame, the business partnership will be severed. In most cases, agreements have set beginning and ending times. In addition, unlike equity financing, which is only available during specific rounds, debt financing is available to entrepreneurs at any time.

Cons of Debt Financing:

• Debt funding can be helpful for new businesses, but it requires a careful strategy. There are a few drawbacks to debt financing that you should be aware of.
• Another problem of debt financing is that it is not as accessible as other forms of finance. Before deciding whether or not to finance a business, most banks will require proof of financial stability and an inventory of assets. Startups often lack the tangible assets necessary to secure bank financing.
• Constantly meeting the requirements of the lender's debt covenants is a tall order, yet it may be necessary for the business to secure debt financing. Usually, the business would need to provide extensive financial records and precise computations to any lender to keep their financing.
• A lender may increase the startup's interest rate or take other corrective action if the company defaults on a loan covenant. Expert financial personnel are typically relied upon by new businesses in order to interpret loan covenants and develop appropriate reporting.

That's where Cogilys Fincorp comes in with a structured solution for Companies who wants to raise debt finance for the progress of their business. To know more about us, visit us at www.cogilysfincorp.com