Debt financing, also known as bond financing, is a financing method for enterprises to use external funds for compensation. Including: bank loans, short-term bank financing (bills, accounts receivable, letters of credit, etc. ), short-term corporate financing bonds, asset-backed medium-and long-term bond financing, financial leasing, government discount loans, inter-governmental loans, loans from world financial organizations and private debt fund loans.
For the funds obtained by debt financing, the enterprise must first bear the interest of the funds, and in addition, it must repay the principal of the funds to the creditors after the loan expires. The characteristics of debt financing determine that its purpose is mainly to solve the problem of working capital shortage of enterprises, rather than spending under capital; Equity financing means that the shareholders of an enterprise are willing to give up part of the ownership of the enterprise and introduce new shareholders through capital increase. With the funds obtained from equity financing, the enterprise does not need to repay the principal and interest, but the new shareholders will share the profits and growth of the enterprise as the old shareholders do. The characteristics of equity financing determine its wide use, which can not only enrich the working capital of enterprises, but also be used for investment activities of enterprises.
Main forms of debt financing
1, bank credit
Bank credit is the main form of debt financing, but for small and medium-sized private enterprises, which account for the vast majority of private enterprises, it is unthinkable for many enterprises to obtain bank loans.
2. Project financing
Project financing is a kind of financial activity that needs large-scale funds. In principle, the borrower takes the fund income owned by the project itself as the source of repayment funds and takes its project assets as the mortgage condition. The general credit ability of the project enterprise entity is usually not regarded as an important factor.
There are two ways of project financing: non-recourse project financing and limited recourse project financing.
Project financing without recourse is also called pure project financing. In this financing mode, the principal and interest of the loan depend entirely on the operational efficiency of the project itself. At the same time, in order to protect their own interests, the lending bank must also obtain property rights guarantee from the assets owned by the project. If the project fails to be completed or fails to operate for various reasons, and its assets or income are not enough to pay off all the loans, the bank has no right to recourse against the project sponsor.
(1) Banks have the advantage of information collection. Banks have the conditions and ability to collect and analyze the investment, operation, distribution and income of enterprises themselves, and at the same time, they can conduct long-term inspection and supervision of enterprises, which is helpful to prevent the emergence of "moral hazard"
(2) Banks have the characteristics of economies of scale in information analysis and research. On the one hand, banks collect the same information with economies of scale, on the other hand, analyzing a large amount of information also has economies of scale.
(3) In the long-term "specialized" financing activities, financial institutions have formed a set of professional skills.
(4) The control of banks over enterprises is a kind of camera control. The function of creditor's rights is that when the enterprise can pay off its debts, the control right is in the hands of the enterprise; if the enterprise cannot pay off its debts, the control right is transferred to the bank.