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Corporate Finance
Working Capital
Growth Capital
Recapitalization
Refinancing
Debt Financing
Equity Financing
Debt Financing
Debt financing can be categorized in several ways, including secured versus unsecured and cash flow-based versus asset-based. With each option, there are differences in how funding is advanced, interest rates, covenant requirements, the degree to which the loan is collateralized, among other term differences.
Many companies opt for an unsecured, or cash flow loan, due to concerns about offering their assets as collateral against the loan or because their assets are not sufficient to support the necessary level of asset-based financing.
Cash flow loans typically come with stringent, and sometimes restrictive financial covenants, such as maximum leverage ratios, minimum fixed charge coverage, interest coverage and minimum EBITDA requirements. Such covenants can limit a company’s ability to operate freely, make acquisitions, repurchase high-yield bonds and stock, etc. If these covenants are violated, the result may be a default and constriction of credit and liquidity.
For “asset-rich” companies, an asset-based loan may make more funds available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for the borrower.
Types of Debt Financing:
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