What is Debt Financing?Definition, Options, Advantage & Disadvantage

1. Bank Loans
All the debt finance facilities, and traditionally based in nature, most commonly used of all are the bank loans. The bank offers different types of loans to their clients which could be used for terms of loan, lines of credit, equipment financing among others.

Term Loans:
Major bulk borrowings to be repaid through fixed instalments over a term, usually one to ten years. Fixed as also floating rates of interest apply. More commonly applied form of term loan is useful for such lumpy capital expenditures as rehabilitation of facilities or acquisition of huge assets.

Lines of Credit:
A line of credit represents availability of a fixed amount of funds whereby, just like a credit card, one can withdraw as much of it as one pleases. Interest paid relates only to the amount withdrawn and is very useful in smoothing short-term fluctuations in cash flow.

Equipment Loans:
loans obtain equipment, and the Bank uses the equipment as collateral even though there are regulated repayments. Such loans are for firms that need costly machinery or technology.

Advantage
 Equipment loans bear relatively low interest compared to any other debts.
 A bank can let out significant sums of capital

Disadvantage
 It normally takes such a long period that one has to prepare a mountainous amount of documentation for the process taken in acquiring the loan.
 It may become hazardous down the road because cash-flowing problems tend to show up, and it might call for collateral.

2. SBA Loans-only in U.S.
An example is the United States, where there exists the Small Business Administration with various loan programs afforded to the entrepreneurs of the countries. Since SBA loans are part secured by the government, then the risk for the lender is reduced; they can lend to small businesses that cannot otherwise qualify.

7(a) Loan Program: Most popular of SBA loans- Use for working capital, inventories, refinance existing debt and any acquisition of an existing business.
504 Loan Program: Funding large, long-term asset acquisitions to stimulate long-term growth: include a single tract of real estate or major equipment purchases.
Microloans: Loans that are of small amounts that are under $50,000. It has proven very helpful for businesses in supplementing new or expanding small businesses or nonprofits for operational expenses.

Advantage
 Lower interest rates and longer payback terms compared to most conventional loans.
 This is easily applied to cover all business needs. 

Disadvantages
 Qualifying criteria for the candidate are somewhat very stringent on minimum credit scores and years in business.
 All this would involve application procedures that would run into years and thousands of pages.

3. Corporate Bonds
They allow large corporations to raise funds by issuing corporate bonds. This is the situation where a firm issuing the bonds to the lenders pays them on face value but keeps coupons in intervals. The nature of the bonds, however fall under three categories; these are the short term those less than five years, the medium and long term those which range from five to twelve years and over twelve years respectively.

Advantage
 They help business organizations tap huge amounts of capital for growth.
 They can be arranged whether or not they are needed by a business and interest rates can also be arranged as well.

Disadvantages:
 Fund mainly towards bigger, more mature business ventures, with strong income statements.
 Benefit from level cash flow to build level interest payment which is on business performance regardless of results.
 It is a type of unsecured, short-term debt paper which is issued by business entities.

4. Commercial Paper The main use of commercial paper is to pay salary or for any other current working capital requirement. Commercial papers usually have lives of less than nine months; thus, it is very suitable for the purposes of short-term or cash funding.

Advantages
 It is a very easy option to pursue capital for short-term requirements
 Because it generally charges relatively low rates of interest compared to conventional loans.

Disadvantages
 It is available only for those businesses with good credit scores.
 Commercial paper is not available for any project undertaken in the long term because it is very short-term.


5. Invoice Financing Invoice financing helps a firm raise funds against its outstanding invoices. For businesses which have to bear the pain of delayed customer payments, this type of finance will be the most useful to get cash in quick time.

Advantages
 Cash without having to wait for the receipt of invoice payment.
 It helps the businesses to continue operating despite their collections for whatever reason being late.

Disadvantages
 High cost and interest charges.
 It fuels funding addiction since the customers get stuck paying the bills after a given period since most customers pay the bills after rather than on date of due date.

6. Merchant Cash Advances
There is usually repayment in the form of automatic transfers of cash from the revenue daily or weekly. This kind of finance had been attractive to small businesses that have a large inflow of cash daily, such as retail shop owners and restaurants.

Advantages
 Cash-in quick with little paperwork.
 Scale directly to income: slower months’ pay less.
Disadvantages

 Interest and fees are very expensive as it is debt.
 The amount repaid can be very cash-intensive to the declines if revenues dramatically decline.

7. Crowdfunding Debt Platforms Crowdfunding debt platforms or crowdfunding debt financing channels through which companies borrow money from the crowd of multiple lenders. Some refer to it as P2P lending. Crowdfunding debt platforms might offer an alternative for companies whose access to traditional funding sources is somewhat poor.

Benefits:
 App process is not very sophisticated compared to applying for a general bank loan.
 Terms and deals on the interest rates are pretty aggressive, in general.

Limitations:
Added expense and cost will come up while using the platform added up to extra costs of borrowing. Huge limitation will be that the amounts available are limited and hence for bigger projects, this will be lacking.

Right debt financing Option
Since the amount of money that is being needed and how easy it is to repay the funds back and what purpose that funding needs to be obtained for the source of debt financing will be dependent on. Brief overview follows:
 For short term and immediate needs: Lines of credit, commercial paper, merchant cash advance will be useful.
 For long term, substantial funding: It has to utilize the term loans from Bank, corporate bonds, or SBA loans for the financing of long-term high 
 For Cash flow management: It can pay off for the time lag by availing invoice financing and lines of credit.