“Debt” is something owed. It’s like a state of being under an obligation to repay something that you received earlier from a person. It may be anything. On the account of financial terms, Debt is an amount of money one borrows from a bank or someone under an obligation to pay back later.
Everyone might have come across debt at least once in a lifetime, be it an individual or a corporate firm. Before owing a debt, you must be aware that repayments are higher than the sum borrowed because the lender always charges a certain amount, which is called interest.
5 Sources of Debt Financing
The following are the most accessible sources of debt financing:
1. Loans:
Most of us are very familiar with the term loan. It is a type of credit vehicle in which debt financing can be done. The loan is when a sum of amount is given to another party which has to be repaid in the future along with its charge amount like interest.
Loans can be in different forms secured, unsecured, commercial, and personal loan. Before lending the money, lenders will consider some criteria from lenders which include the borrower’s income, credit score, and history of debt clearance.
By loaning out the funds with some charges, lenders can provide funding for economic activity which can be compensated for their risk.
2. Bonds:
Bonds are also a type of debt instrument. Through bonds, the Government or any companies raise their funds. Some institutions offer bonds, owing to paying the interest regularly to the investors.
Some small institutions raise money by selling bonds themselves though there is risk involved, such bonds typically have to pay a high rate of interest. There are different types of bonds short-term bonds, medium-term bonds, long-term bonds, secured bonds, and unsecured bonds.
Short-term bonds are offered by companies that require immediate needs and mature within one to three years. Medium-term bonds typically reach maturity in 10 or more years, and long-term bonds are issued by companies that require funding over an extended period like 30 years or more.
Secured bonds are backed by collateral whereas unsecured bonds are not backed by collateral. In case, a company is unable to get a bank loan, bonds can sort out the problem by offering alternative investors to become lenders. Thus, Lenders can either buy bonds or sell them to investors.
3. Online lenders:
In recent decades, online lending has become popular due to its key features and low-cost options. Borrowers can access online lending options from anywhere with less paperwork. The flexibility in online lending allows the user to choose any type of loan.
Increased access to credit is the major advantage of online lending. It is more affordable than traditional services. More choices are available in online lending. Faster loan approvals are done in online lending.
They are typically safe. Before stepping into an online lender or online lending, be aware of the terms of the loan, interest rate, and risk associated with it.
4. Peer-to-peer lending:
Peer-to-peer lending is a form of direct lending of money to individuals or businesses without an intermediary financial institution in the deal. It is also regarded as ‘social lending’ or ‘crowd lending’.
There are prominent competitors with the birth of sites like Kick-Starter, Prosper, Lending Club, Upstart, and GoFundMe. This lending option is most appropriate for small start-up entrepreneurs, small businesses, and individuals who can feel comfortable revealing their financial details publicly.
Though funds can be extended here, they come with high fees and interest rates for the borrowers. Perhaps most regrettably, these services don’t provide the professional guidance and flexibility that established lenders do.
5. Credit:
The credit facility is also a form of debt. Many business owners have used credit cards to enhance their companies with future lending associations. Small business credit cards are guaranteed personally through the buyer who can establish business credit.
Some credit cards come with favorable offers, cash-back or points rewards, and attractive discounts. Credit cards can also lessen the burden on less expensive departments because a single monthly bill is paid instead of so many unrelated invoices.
Of course, the impact of its drawbacks can be significant; credit cards provoke high interest rates for cash advances and late repayments.
Conclusion
Thus, these are some sources of debt. Though debt can ease the burden of financial needs in an emergency, it is advisable to avoid it if it is not essential. Before getting or owing a debt, you must consider its cons.
The debt must be repaid no matter how high the interest rate is and its potential impact. Accumulation of too much debt can put you at risk and trouble you at worst. So, think twice before you owe a debt.