Debt Financing –
simply explained

Key facts at a glance:

• In debt financing, the capital comes from external lenders.

• There are many types of debt financing, from leasing and overdraft facilities to business loans.

• Unlike equity financing, debt financing allows liquidity and returns to be improved without lenders having influence over management.

• Business loans from Teylor are a flexible, fast and partly unsecured form of debt financing.

What Does Debt Financing Mean?

Debt financing is one of the most important tools for the development of a company. From founding and safeguarding ongoing operations to acquisitions — external capital can play a role in all stages of a company's life cycle. Here you can learn more about the characteristics of debt financing, the types available and its advantages.

Debt financing helps entrepreneurs in many situations to respond to challenges, expand operations and actively shape their own development. But what exactly characterises debt financing? What types exist and what concrete advantages do they offer companies and their goals? We address these questions here and also explain the individual benefits that debt financing through business loans arranged by Teylor provides.

The Characteristics of Debt Financing

Debt financing, also known as external capital financing, is a term from business administration. It refers to corporate financing in which funds are raised from external lenders. The opposite is equity financing — where the funds come from within the company itself.

In debt financing, the lenders become creditors, as the company now has liabilities towards them. The provided capital is only available to the business for a limited period. This is because the external lenders have a right to repayment, also known as amortisation. In addition, interest is charged on the borrowed capital. The capital providers in debt financing can be banks, institutional investors such as those arranged by Teylor, suppliers, private investors and others.

Such external capital providers have no say in the company. They also assume no liability for potential losses. For many types of debt financing, tangible collateral such as machinery or buildings is also required. This provides lenders with security in case the borrower defaults later. The unsecured business loans arranged by Teylor are one of the exceptions among the various types of debt financing.

What Types of Debt Financing Exist?

External capital financing can take various forms and come from different lenders: from short-term supplier credits to traditional bank loans to flexible business loans arranged by Teylor.

Here are some examples:

• Supplier credit: a credit granted by a supplier or service provider for a delivery or service. In supplier credit, a longer period — a payment term — is agreed with the buyer within which the goods or service must be paid. Additionally, a cash discount is granted for a certain short period. If the company pays within this period, a discount on the sale price applies. If the period expires, the full, higher price must be paid for the remaining time. Supplier credits are often expensive when the short-term cash discount cannot be utilised.

• Leasing: Leasing, as a so-called credit substitute, is also a type of debt financing. A lessor provides a leasing company with an asset such as a machine for use for a specified period. Regular leasing fees apply. Leasing avoids the costs of new acquisitions but is overall often more expensive compared to other forms of debt financing. Moreover, tax investment deductions cannot be used here.

• With bonds, an external capital provider purchases securities and thereby provides a company with money. In return, they receive the documented right to repayment and regular interest. The latter can be fixed or variable. Repayment of the borrowed money in the case of bonds usually occurs at the end of the financing period. Bonds are often tradeable and set up for long periods.

• Loans or credit from financial institutions are the classic form of debt financing. They are agreed for different periods and used for a wide variety of business occasions — for example, long-term investments in fixed assets. For this type of debt financing, extensive tangible collateral such as buildings or machinery is usually required. Overall, banks are obligated to avoid risk through strict regulations. That is why bank loans often require good creditworthiness from borrowers and typically involve lengthy rating processes and additional conditions in loan agreements.

• Overdraft facilities are a special form of debt financing provided by banks. Overdraft facilities serve to cover ongoing costs such as rent payments or raw material purchases. A revolving loan is agreed between the company and the lender, which can be drawn upon up to a certain limit. This is known as the overdraft line. Although interest only applies to amounts actually drawn, this form of debt financing is often very costly.

• Digital business loans are arranged by online providers like Teylor. Business loans are partly unsecured, available for various durations and flexible in their design. They are suitable for raw material purchases, smoothing the results curve or upcoming investments. Another feature of business loans is the use of digital technologies in the lending process. This allows for precise and fast credit assessment as well as usually prompt disbursement.

As different as these types of debt financing are, they all share a number of advantages.

What Are the Advantages of Debt Financing?

Financing through an external capital provider can take many different forms. What are the concrete advantages for companies?

• Increased liquidity: Debt financing can provide liquid funds that are usually not otherwise available. This can be crucial for investment needs and in many other business situations.

• Improved productivity: Debt financing helps to expand operations and thus produce and sell more. Service providers also increase their productivity: they continue to expand their business and can sell their services to even more customers.

• Higher profits: If affordable external capital can be acquired, for example to cover production costs for goods, the so-called leverage effect can be utilised. If the interest on a loan is lower than the return from selling the goods, profits can be increased. This also increases the company's return on equity, because by taking on external capital, more equity is ultimately generated.

• Reduced tax burden: The regular interest incurred in the company's debt financing counts as operating expenses. It may be deducted from the profits made. This reduces the amount of taxes payable.

• No influence from capital providers: In the various types of debt financing, the capital providers merely become creditors of the company. Unlike equity providers, they have no say in the company.

• No profit sharing with financiers: In most types of equity or mezzanine financing, the lenders must share in the company's profits. This is not the case with debt financing. Here, creditors are only entitled to repayment of the borrowed amount and regular interest.

External capital offers a company a whole range of models and advantages for different challenges. However, it must be individually assessed which type of financing appears most promising in each case.

Moreover, a balanced mix of equity and debt financing should always be maintained. If the share of external capital in the business becomes too high, the entrepreneurial risk also increases. Additionally, taking on further — especially traditional — debt financing becomes increasingly difficult.

In addition to the advantages mentioned so far, financing through the business loans arranged by Teylor offers a whole range of additional benefits.

Your Advantages of Debt Financing Arranged by Teylor

In many business challenges, time is of the essence: a growing company must invest in production equipment as quickly as possible to meet customer demand; a business with seasonal operations needs a short-term bridging loan. Here, debt financing through business loans arranged by Teylor provides timely solutions.

Thanks to the user-friendly platform and the use of modern technologies, the assessment and disbursement process is thorough, transparent and fast. Moreover, the arranged products are flexible and can be precisely tailored to your needs. The waiver of collateral makes the solution even better suited to your individual requirements.

Conclusion

Debt financing is the financing of a company through external lenders. It offers a whole range of different approaches — from supplier credits and leasing to business loans.

In addition, there are numerous advantages: liquidity, productivity and profits can be increased without capital providers needing to be involved in management or profit sharing. Teylor's business loans also stand out through speed and flexibility.