Debt financing involves borrowing money that must be paid back over time. There are several sources of debt financing for both working capital in the short-term and long-term needs. Sources of short-term working capital include trade credit, bank loans, commercial paper, and factoring. Sources of long-term financing include debentures, term loans, and securitization, with debentures being long-term securities that pay a fixed interest rate. Proper debt financing allows companies to augment resources and meet both short and long-term capital requirements.

1. DEBT FINANCING
KUNWAR ATUL SINGH
INSTITUTE OF MANAGEMENT STUDIES (FMS), BHU
MBA III SEM.
ROLL NO. 20
Mliag..

2. DEBT
 Debt is an amount of money borrowed by one party
from another.
 Debt instruments indicating that company has
borrowed certain sum of money and promise to
repay it in future under clearly defined terms.
 Debt consists of term loan, debentures, commercial
papers, over draft, public deposits, corporate
deposits, discounting.
Mliag..

3. SOURCE OF DEBT FINANCING
• Trade Credit
• Bank Credit
• Commercial Paper
• Factoring
Working
Capital
• Debentures
• Term Loan
• Securitisation
Long
Term
Mliag..

4. Working Capital Financing
Mliag..

5. TRADE CREDIT
 Trade credit is the credit extended by suppliers of
goods and services in the normal course of
business.
Mliag..

6. BANK CREDIT
Bank
Credit
Cash
Credit/
Overdraft
Loans
Purchase/
Discount
bills
Letter of
credit
W.C .
Term Loan
Mliag..

7.  Cash Credit / Overdraft
 Under cash credit/ overdraft form/ arrangement of bank
finance, the bank specifies a predetermined borrowing/
credit limit. The borrower can up stipulated credit/
overdraft limit.
 Limit is called as Line of Credit
 Line of Credit is an agreement between a bank and a firm
specifying the amount of short term borrowing the bank
would make available to the firm over a given period of
time.
 Purchase/ Discount of Bills
 The seller of goods draws the bill on the purchaser . The
seller’s bank purchase/ discount the bill and sends it to the
buyer’s bank for collection. The buyer’s bank release the
documents to the buyer on receipt on payment in case of
demand bill or on buyer accepting to pay on due date, in
case of usance bill, which does not exceed 90 days. Mliag..

8.  Letter of Credit
 Letter of credit is a letter written by a bank stating that
the bank guarantees payment of invoiced amount if all
the underlying agreements are met.
 Working Capital Term Loan
 Under this arrangement, banks advance loans for for 3-
5 years repayable in yearly or half -yearly instalments.
Mliag..

9. COMMERCIAL PAPERS
 Commercial Paper is form of financing consisting of
short term insecured promissory notes issued by a
firm with high credit rating.
 90-180 days.
Mliag..

10. CERTIFICATES OF DEPOSITS
 Certificates of deposit is a marketable receipt of
funds deposited in banks for a fixed period at a
specified rate of interest.
Mliag..

11. FACTORING
 Factoring can be defined as an agreement in which
receivables arising out of sale of goods/ services
are sold by a firm (client) to the factor (a financial
intermediary) as a result of which the title of goods/
services passes on the factor.
Mliag..

12. CLIENT
(SELLER)
CUSTOMER
(BUYER)
FACTOR
1. Placed Order
2. Delivers goods
& invoice with
notice to pay the
factor
6.
Follow
up
7.
Pays
8.
Pays
Balance
amount
5.
Payable
up to
80%
4.
Sends
Invoice
Copy
2.
Fixes
customer
limit
Mliag..

13. INTER-CORPORATE DEPOSITS
 A deposit made by one company wit another
company, normally for a period up to 6 months, is
referred to as an inter-corporate deposit.
 Three types
 Call Deposits – withdrawable on giving a day’s notice
 Three months deposits
 Six months deposits
Mliag..

14. PUBLIC DEPOSITS
 Unsecured deposits from the public
 Interest rate varying 8-12%
Mliag..

15. RIGHTS DEBENTURES FOR WC
 Public limited companies can issue “rights”
debentures to their shareholders with the object of
augmenting the long-term resources of the
company for working capital requirement.
 Debt equity ratio should not exceed 1:1
 Debenture issued should not exceed (a) 20% of the
gross current assets (b) 20% of the paid up share
capital.
Mliag..

16. Long Term Debt Financing
Mliag..

17. DEBENTURE
 It is a long term security yielding a fixed rate of
interest, issued by a company.
 Types of Debenture
 Convertible & Non Convertible
 Redeemable & Irredeemable
 Secured & Unsecured
Mliag..

18. LONG TERM LOAN
 Term loan is a loan made by a bank/ financial
institution to a business having an initial maturity of
more than 1 year
Mliag..

19. SECURITISATION
 Securitisation is a process of pooling and
repackaging of homogeneous illiquid financial
assets into marketable securities that can be sold to
investors. The assets are generally secured by
personal or real property such as real estate,
automobiles or equipment loans.
Mliag..

20. Thank you.....
Mliag..