The Sunday Mail
Debt Consolidation: Debt consolidation means combining more than one debt obligation into a new loan with a favourable term structure such as lower interest rate structure, tenure, etc. Here, the amount received from the new loan is used to pay off other debts.
Description: Debt consolidation is used by consumers to pay off a small debt in one go by taking one big loan. By doing this they save on interest as well as the finance cost of the small loan owed by them. The borrower would now have to make one payment instead of making multiple payments to other creditors.
Debt consolidation can happen on debts which are not tied up to an asset. Education loan, amount owed on credit card, personal loan are some examples of unsecured loans, which can come under debt consolidation.
There are some steps which borrowers should follow when they are planning to consolidate their debt. Identify your debt(s) obligations, the total amount that you owe the lenders, time period or tenure, apply for a consolidation loan, once you receive the loan pay off other debts, stick to the payment cycle of the consolidated loan.
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Debt Finance: When a company borrows money to be paid back at a future date with interest it is known as debt financing. It could be in the form of a secured as well as an unsecured loan. A firm takes up a loan to either finance a working capital or an acquisition.
Description: Debt means the amount of money which needs to be repaid back and financing means providing funds to be used in business activities. An important feature in debt financing is the fact that you are not losing ownership in the company.
Debt financing is a time-bound activity where the borrower needs to repay the loan along with interest at the end of the agreed period. The payments could be made monthly, half yearly, or towards the end of the loan tenure.
Another important feature in debt financing is that the loan is secured or collateralised with the assets of the company taking the loan. This is usually part of the secured loan. If the loan is unsecured, the line of credit is usually less.
If a company needs a big loan then debt financing is used, where the owner of the company attaches some of the firm’s asset and based on the valuation of those assets, loan is given.
Let’s understand debt financing with the help of an example. If a company requires a loan of $10 crore, it can raise the capital by selling bonds or notes to institutional investors.
Debt financing is an expensive way of raising funds, because the company has to involve an investment banker who will structure big loans in a systematic way. It is a viable option when interest costs are low and the returns are better.
A company undergoes debt financing because they don’t have to put their own capital. But too much debt is also risky and thus, companies have to decide a level (debt to equity ratio) which they are comfortable with.
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