Want to Know Whether or Not Private Debt Financing Is for Your Company?
Private companies oftentimes opt for debt financing when they need money for the business. Debt instruments are sold to interested parties and allow a company to raise lots of capital quickly. Unlike public companies that can put up their stocks for sale to the public, private companies lack the privilege to do so. Therefore, they turn to private debt financing. See how private debt financing works in Indian companies and whether it is for your company below.
How Does Private Debt Financing Work?
First, it is important to understand what private debts are. Private debts refer to the debts accumulated by private companies for capital raising purposes. In essence, private debts are essentially private lending from various financial institutions. A firm or a company borrows a sum of money from a lender at a mutually agreed interest rate, repayment period and due date. Private debt financing allows a company to safely borrow the money needed to operate and run business activities.
Is Private Debt Financing for Me?
Many companies try to keep up with the ever-changing current of economic globalization. To remain competitive and relevant in one of the biggest markets in the world, companies have to take several initiatives to stay on the top, which includes private debt financing. Debt financing comes with its own sets of benefits, downsides and risks. Before making a decision on whether or not to opt for private debt financing, one has to first carefully weigh in the pros and cons, such as these factors:
Pros:
- Raise capital quickly.
When a private company needs money, it will turn to private debt financing from lending institutions. With an agreed interest rate, the lender will provide the company with the capital it needs in a short amount of time. - Maintain ownership.
You can opt for private debt financing and still have complete ownership and control over your company. Unlike public companies, you do not need to hand over your company’s exclusive rights to the lenders. - Tax deductions.
Paying back the loan is considered part of the business expenses. This will reduce your overall tax rate. It’s a win-win situation as your private company gets to expand with increased capital and at the same time enjoy a lower tax rate.
Cons:
- Collateral and cash.
Most lenders will necessitate borrowers (private companies) to put up an asset as collateral. Lenders do this to avoid loss if the private company fails to generate cash flow or pay back the owed money. On the other hand, if the lender did not make the debt a secured loan or ask for collateral to be put up, the credit funded to the private company will most probably below. - Interest rates can be high.
Depending on whom the lender is, the interest rates for private debt financing can be high. If the private company has a less than impressive credit record, then the interest rate applied to the debt may be high. Heavy interest rates can have an adverse effect on private companies and may pose a burden instead.
Understanding Private Debt Financing
At the end of the day, private debt financing for India companies is a gamble. Therefore, before choosing to opt for private debt financing for India companies, do your research to tilt the odds in your favour. You can also engage a corporate professional’s services and discuss the success probability of private debt financing for your company.
