What is The Meaning of Debt Financing?

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Debt financing is an alternative source of capital for small businesses.

It is important to start the process of looking for debt funding early, and not wait until your business is in a real cash-flow crunch.

It is a major turn off to most commercial lenders, and you will lose your negotiating leverage and weaken your company’s financial position if you wait.

How Debt Financing Works

The maximum debt that a small business will be able to handle will involve balancing the costs and risks of defaulting on a loan, against the owners’ desire to maintain control.

If your business plan and cash-flow projections reveal that making loan payments will strain your company’s financial condition, or that you don’t have sufficient collateral.

You should explore other equity financing alternatives.

It is simply not worth driving your company into bankruptcy just to maintain maximum ownership and control.

You should also compare the level of debt financing you are planning to get against the typical ratios for businesses in your industry.

Once you’ve figured out your maximum debt-to-equity ratio, you can look into available sources of debt financing.

Also consider the business and legal issues involved in borrowing funds from a commercial lender.

Letters Of Credit

These are issued by commercial banks in connection with international sales transactions to expedite the shipping and payment process.

In a typical letter-of-credit scenario, the seller will demand that payment be made in the form of a letter of credit.

The buyer must then make arrangements with the issuing bank to issue the letter of credit.

Types Of Debt Financing

Short-term Loans

These are used for a specific purpose with the lender expecting the loan to be repaid at the end of the project.

A short-term loan is made in the form of a promissory note payable on demand.

It may be secured by the inventory or accounts receivable that the loan is designed to cover, or it may be unsecured with no collateral required.

Operating Lines Of Credit

Lines of credit consist of a specific amount of debt that is made available to a business on an “as needed” basis over a specified period of time.

A line of credit may be short term (60 to 120 days) or intermediate term (one to three years), renewable lines of credit or nonrenewable, and at a fixed or fluctuating interest rate.

Intermediate-term Loans

These loans are provided over a three to five year period for the purposes of acquiring equipment, furniture, working capital, business acquisition, inventory, and business expansion.

The debt is secured not only by the assets being purchased with the loan proceeds, but also by the company’s assets, such as inventory, accounts receivable, equipment, and real estate.

Long-term Loans

These are extended for specific and highly secured transactions such as the purchase of real estate or a multi-use business facility.

A lender will consider extending a long-term loan to a small business for 65 percent to 80 percent of the appraised value of the land or building.

Factors Determining Debt To Equity Ratios

A proper debt-to-equity ratio for your business will depend on a wide variety of factors, including:

  • The impact that your obligation to make payments under the loan will have on the cash flow of your business,

  • Your costs relating to obtaining the loan,

  • Your need for flexibility in the capital structure so you can respond to changing economic or market conditions,

  • Your access to alternative sources of financing,

  • The nature and extent of your company’s assets (tangible or intangible) that are available as collateral,

  • The level of dilution of ownership and control that your shareholders (and managers) are willing to tolerate,

  • Certain tax considerations (interest payments are a deductible expense, but dividends are not).

Financial information; This includes financial statements (best case/expected case/worst case), federal and state tax returns, company valuations or appraisals of key assets, current balance sheet, credit references, and a two-year income statement.

Schedules and exhibits; This should include key documents such as agreements with strategic vendors or customers, insurance policies, leases, and employment agreements, to be attached as exhibits.

What Constitutes A Good Loan Proposal?

A good loan proposal should include;

Summary of the request; This is an overview of the history of the company, amount of capital needed, proposed repayment terms, intended use of the loan, and the collateral available to secure the debt.

Borrower’s history; This is a brief background of your company, finance structure, founders, stage of development and growth plans.

It may include a list of your customers, suppliers, and service providers, management structure and philosophy, main products and services.

Also includes an overview of any intellectual property you own or have developed.

Market data; This is an overview of trends in your industry, the size of the market, your market share, and an assessment of the competition.

Also your sustainable competitive advantages, marketing, public relations, and advertising strategies, market research studies, and relevant future trends in your business industry.

What May Cause Loan Proposal Rejections?

Your loan proposal may get rejected if it shows;

  • Unrealistically low business expense forecasts

  • It is improperly completed

  • Inability to take constructive criticism

  • Underestimated financial requirements

  • Little or no experience in the business industry

  • Overstated company revenue projections

  • Attempts to pit one lender against another

  • Lack of adequate debt collateral

  • Poor communication skills

  • Cash-flow projections that do not demonstrate an ability to repay the loan

  • Cash-flow projections without adequate supporting documentations

  • Lack of understanding of the loan proposal and approval process

What Are Our Debt Financing Terms?

Minimum Funding Amounts: Minimum loan amount is USD $1.5 million in the USA and USD $3 million for International project financing with no maximum loan amount.

Geographic Area: North America, South America, Caribbean, Western/Eastern Europe, Australia/New Zealand, Korea, Japan, Taiwan, Malaysia, Indonesia and other select USA-friendly locations worldwide

Funding Types: New development, acquisition and refinance.

Loan Terms: to be determined by property type, loan amount and findings during formal underwriting.

Common Loan Term: 5-10 year term loans amortized over 10, 20, 25 or 30 years; 15-30 year term loans amortized over 15, 20 or 30 years.

Interest Rates: rates are calculated from cost of funds against LIBOR, Prime or Treasury rates.

This is determined based on property type, loan amount and findings during formal underwriting. Ranges are estimated between 6% - 8% with no pre-payment penalties after 24 months.

Loan to Value: Up to 80% depending on property type, loan amount and other factors; this also could include up to 70% of "completed value", which could mean up to 100% of costs.

Debt Service Coverage Ratio (NOI/debt service): minimum 1.25x, varies by property type.

Recourse/Non Recourse: can only be determined through formal underwriting.

Do We Offer Debt Financing?

We offer debt financing for USA and International projects. Debt financing ranges from USD $3 million minimum to USD $1 billion or more.

We serve through our mission to be a catalyst to help our clients get timely financing.

Now you can get debt financing for your business or project worldwide. Ready, willing, and able to fund viable and underwritten projects and businesses.