What is Debt Funding?
08 January, 2024
Running a business typically involves substantial costs. Finance plays a crucial role every step of the way. Be it purchasing equipment, leasing real estate, maintaining working capital, or expanding operations, funding is required. Traditionally, you can seek investment by diluting your equity to meet your company’s financial needs. But equity financing involves giving up a percentage of your ownership. An alternative method is borrowing funds. In this article, we explore what debt funding is, its types, and advantages.
What is Debt Financing?
Debt funding refers to the process of seeking credit from banks, financial institutions, or external investors. When you opt for debt funding, you are essentially taking on a debt, a loan that you promise to repay over a stipulated period along with the applicable interest on the principal amount. The repayment is made either monthly, half yearly, or towards the end of the loan tenure, based on the type of debt funding option you choose.
Types of Debt Funding Options
The debt funding options available in India include:
Business Loans
You can apply for secured or unsecured Business Loans and borrow money to meet your company’s financing needs. Secured Business Loans require you to pledge collateral, while unsecured Business Loans are sanctioned based on the financial standing of your business.Debentures
A debenture is a type of unsecured Bond issued by a company or an organisation to raise capital. If you are in need of funds, you can issue debentures to potential investors. When they invest in your debentures, they are essentially lending you money, which you must repay with interest.Line of Credit
If you need funds to meet the working capital needs or other small-scale business expenses, a line of credit is an option for debt financing. It is a form of flexible loan where you can borrow funds as needed and only pay interest on the amount borrowed instead of opting for a lump sum credit.Bonds
Bonds are long-term debt instruments that you can issue to raise capital for your business. When you issue bonds, you assure the investor that you will make periodic interest payments and repay the principal amount at the time of maturity.
Advantages of Debt Financing
Opting for debt financing proves beneficial in the following ways:
Tax Savings
The interest payments made on debt are typically tax-deductible expenses for businesses. You can claim the tax deduction on interest paid while filing your company’s tax returns. With this tax saving benefit, you can reduce your tax liability, while you utilise the borrowed funds to the fullest.Ownership Retention
Unlike equity financing, there is no dilution of ownership in the case of debt financing. The only criterion is to borrow funds and repay the principal amount along with the interest over the stipulated time to maintain a healthy debt to equity ratio.Flexibility
No matter the type of debt financing option you choose for your business, the interest and repayment schedules are clearly communicated beforehand. Besides, most options let you make payments over a period of time in periodic instalments. Hence, you enjoy flexibility in planning and repayment.Diversification of Funding Sources
Debt funding provides an additional source of financing alongside other forms of capital like invoice financing, equity, internal funds, etc. Sourcing from varied finance options reduces your business's dependency on a single avenue and spreads the risk.Lower Cost of Capital
Depending on the creditworthiness of your business, debt financing can incur a lower cost of capital than equity financing. Interest rates on debt instruments are generally lower if your business has a strong credit profile and stable financial standing.
Explore Debt Financing Solutions Offered By HDFC Bank
Now that you know the meaning of debt financing, you can find the right instrument to fund your business expenses. If you are looking for a convenient solution, HDFC Bank offers various types of Loans with flexible repayment terms and competitive interest rates. You can apply for a Regular Business Loan, Loan Against Property, Digital Loan Against Shares & Mutual Funds, Working Capital Loan, or Gold Loan. Consider your financing needs and the eligibility requirements to make the right choice.
Meet your debt financing needs with Business Loans from HDFC Bank.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.
