Debt financing and equity funding are both methods of financing a profitable business but they vary greatly regarding the conditions associated with financing, the kind of business, the stage at which a precise business is during its period and so on. To have a good realizing and difference between them this particular article explains these two loans types individually.
An acceptable definition of debt financing is
“A method of funding in which a company receives a mortgage against the promise of repaying this loan”
The definition might suggest that that is a quite crude method of financing with high risk for the financial institutions but there are a lot of factors associated which bounds the consumer to pay back. The financing incorporates both secured and unsecured loans.
The security in the former event involves a collateral just as one assurance of repaying the loan and if the debtor isn’t able to repay the collateral can be fortified to settle the debt. The safety can include an array of forms which includes guarantors, equipment, real estate, insurance policies, ware household inventory, display merchandise and so on. The security depends greatly around the type of business.
In case of unprotected loan the borrower’s credit history is the main security. This sort of loan can range from a very few hundred dollars to thousands of dollars all depending upon the borrower’s respect with the bank or any borrower for that matter. This type of debt financing however is usually simple termed with high rates of interest. Exterior lenders tend to avoid signature loans unless you have great credit history with them but even then depending upon the economic conditions or your latest financial condition they may require quite a few collateral.
Other than the above a couple of divisions, debt financing is usually categorized in terms of the payment period. The three generally known time periods are ;
a. Short Term Loans