Debt financing

What is debt financing?

Debt financing, also known as debt funding, is when a company borrows money to be repaid at a future date with interest, over a set period of time. A loan can come either from a lender – see business loans – or from selling bonds to the public.

If your business needs to raise money (capital) you can either borrow from a lender (i.e. debt financing) or sell a share of ownership in your business (equity financing) in return for capital. You can of course combine the two.

What is included in debt financing?

Debt financing includes, for example, business loans, overdrafts, equipment leases, invoice discounting and R&D tax credit loans as well as fixed income products such as bonds, bills, or notes.

You will find there are debt products to suit just about every business stage and situation, whether you are looking for startup finance, working capital finance or a longer-term business loan.

How does debt financing work?

The details vary, but in all cases your business is taking on debt – the lender gives you cash in return for regular repayments that add up to the principal amount you borrowed plus interest within an agreed time frame. The lender usually has a clear idea of how much they’ll get back.

At Swoop Funding, there are three primary options for companies seeking financing: selling equity, taking on debt, or a combination of both. Equity represents ownership in the company and provides shareholders with a claim on future profits. Unlike debt, equity doesn’t need to be repaid, but in case of bankruptcy, equity holders are last in line to receive payment.

Alternatively, companies can pursue debt financing by selling fixed income products like bonds, bills, or notes to investors. When a bond is issued, the investors who purchase it become lenders, providing the company with capital for growth and expansion. The principal amount of the investment loan must be repaid at an agreed-upon future date. If the company goes bankrupt, lenders have priority over shareholders for any liquidated assets.

If you’re an established business looking for growth finance or a buyout you might also want to consider direct lending, which is a type of private debt.