A company uses debt financing for working capital or expenditures. It does this by selling bonds or notes, usually to individuals or institutional investors who become creditors and in exchange for the loan receive the principal and interest on the loan. Unlike with equity financing, the company does not give up part of the company. Some of the advantages to debt financing include: The bank or lending institution (such as the Small Business Administration) has no say in the way you run your company and does not have any ownership in your business; the business relationship ends once the money is paid back; the interest on the loan is tax deductible; loans can be short term or long term; and the principal and interest are determined so they can be budgeted for.
Types of Debit Financing forms used:
Pledge and Security Agreement
Pledges are a form of security to assure that a person will repay a debt or perform an act under contract. In a pledge one person temporarily gives possession of property to another party. Every pledge has three parts: two separate parties, a debt or obligation, and a contract of pledge.
Contract between a borrower and a secured lender, or between an obligee and obligor, that specifies which asset(s) is pledged as security, and under which conditions the lender or the obligor may foreclose on it.
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms.