There are three primary types of capital that businesses can generate: equity, debt and hybrid. Equity capital involves selling shares of your stock in exchange for real money, whereas debt capital involves taking on debt in exchange for real money. And as the name suggests, hybrid capital combines elements of both types, such as a convertible bond that’s influenced by the respective stock price. Today, we’re going to take a closer look at how to raise debt capital, revealing its unique benefits and how to acquire it.
How to Raise Debt Capital
Debt Capital: The Basics
As previously mentioned, debt capital requires you to take on debt in exchange for real money. The bank or financial institution essentially loans you money under an agreement that you’ll repay it according to the specified terms, typically with interest.
The main benefit of debt capital over equity capital is the simple fact that you don’t have to forfeit partial ownership of your company. With equity capital, you don’t technically borrow money, but rather you “buy” it using shares of stock. As a result, you have less ownership of your company. This isn’t an issue with debt capital, however, as you keep your company’s stock while taking on debt instead.
Secured vs Unsecured Debt Capital
There are two primary types of debt capital: secured and unsecured loans. Secured debt capital requires you to place assets or other property of monetary value up as collateral, whereas unsecured debt capital does not require collateral.
Lenders are often reluctant to issue debt capital to new businesses with little-to-no credit, fearing the business may fail to pay back the loan. By requiring the business to use collateral, however, the bank has a safeguard in case of nonpayment. Secured debt capital is typically easier to acquire for this reason.
Tips on Getting Approved for Debt Capital
If you’re interested in acquiring debt capital for your business, you should run a credit report for both your business and yourself. Banks will scrutinize your credit to determine whether or not you are a suitable candidate for debt capital.
Additionally, prepare a business plan that outlines the way in which you intend to use the money. Even if your business is still relatively new, a strong business plan can help increase your chance of getting approved for debt capital.