The Risks Of Debt Capital Financing By Sophie Kinsella
Debt financing is a company strategy to raise funds for the expansion of its business by borrowing money from the individual lenders or from the banks. The contract entails that the company is bound to repay the debt incurred to its creditors with a pre determined interest rate and within certain period of time. In most cases, the time span is generally shorter. It is a prevalent strategic approach adopted by any company to utilize the public money as an effective investment and make use of it to meet the greater objective of its organization or compensate or overcome any business hurdle. Now, when debt capital can be looked upon as a leveraged tool to generate more revenue, it can strap any brand new and small company into multiple hassles. To get debt relief a company sometime borrows further from other source to compensate its investors. And it may worsen its situation and finally compels it to file bankruptcy. Now let us check other risks involved in the process of debt financing.
First of all it becomes a huge problem for any startup company to raise its fund by taking loans. It is because without assessing the track record of a company regarding its credit rating, its growth percentage in recent past and possibility in future growth, no investors feel interested to put their money in that company. However, after raising enough funds, if the company gets unable to repay its lender at the due date and time, it severely affects its credit score restricting its future access to getting further loans. Moreover, the extra charge that is borne out due to late payment grows as substantial surplus in the long run and cripples the inner growth of the company. If the lender lodges any complain or sue against the company, it is no less a drawback in terms of tarnishing the company image. And this in turn affects its credibility as a trusted company. So these are pitfalls we have to consider carefully before we begin to invest with the public money.
Debt financing again poses the danger for a company to lose its collateral which may be some precious assets of the company. Unlike stocks as debt financing comes through company bonds, here the company becomes legally bound to reimburse its lenders within stipulated time frame. And in case it defaults, the company comes at a stake to lose its collateral. Therefore, it is also a great lose.
In most cases, when an investor lends money to the company in the form of purchasing bonds, he does not become a profit sharing partner of the company or a partial owner of the company. But in some cases, the investors demand partial ownership in exchange of their lending money. And this way they can exert their control over key strategic decision that you have cherished as the goal for your company.
Considering the above pitfalls underlying the prospect of debt financing strategy, we can say that undoubtedly it is a great way of generating more cash flow into your company. But the possibility of inherent danger is still lurking in it and can prove to be fatal if your company’s managing committees lack clear vision about the company’s financial objective based on proper analysis of the data and current market scenario.
Author’s Bio: Sophie Kinsella is a contributory guest columnist for various websites and communities including Oak View Law Group and CMFA . She has completed her Graduation in Finance and is currently working with an Investment company located in California. She has written some great articles on topics like bankruptcy, investment opportunities, debt settlement programs, debt settlement new york and many more.
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