Money, i.e. cash in hand is required for any and every activity that a business does. A large business may be able to extract credit from its vendors, but some activities cannot be completed without upfront payment. The main role of any CEO and a CFO is to ensure that the organization has enough funds on hand to carry out its day to day business activities. They have to ensure that the organization does not run out of funds or is suffocated by the cost of raising funds.
There are various ways to raise funds for a business. These include taking loans, selling stakes, pledging shares, debentures, purchase order financing, etc. It is important to be a Private or a Public Limited company for the same. Raising funds is an important task that has to be done without taking on a very heavy burden of interest and without ceding too much equity of your company. These two are very important parameters as professionals who have spent a lot of time in the industry can vouch for the fact that a wrong decision here can make or break your business. Business are sometimes able to grow their sales, but still unable to repay their loans due to the steep rates of interest. Sometimes, funds are raised by ceding equity and this in the process results in the founders losing control of the company and the creditors installing their own management.
Knowing the best solution for this challenge is hence very very important. Raising funds from debt markets is one popular way for companies to raise funds. This is popular method as the debt owners will offer funds at extremely favourable rates of interest and comfortable payment terms without asking for a stake in the company. Debt funds depend heavily on the past performance of a company and its senior management. Another reason for the popularity of debt funds is that the creditors do not get a major say in the operations of the company as they are not entitled to a seat on the board of the company.
The debt markets are not as big as the retail banks and only the well networked can help you get a good deal. Most debt markets are based in major financial hubs. BSE Institute Ltd is a decade old institute that offers courses in understanding all major and minor financial concepts, right in the middle of India’s financial hub, Mumbai! It offers executive education for senior industry professionals to excel and grow professionally.
Raising funds from debt markets can be tricky business as very few people know about it and its quite easy to get a bad deal. Like a loan, debt fund owners will go to any extent to get their money back. Non-repayment of their money can result in the creditor launching a company winding up petition in courts to sell all the assets of the company and get themselves paid. There are multiple conditions that debt owners can put on a company. The debt owners may demand that they should always be paid before shareholders are paid their dividends, company bonuses should not be paid before they are paid, etc. There can be many creative ways in which they ask for their payments to be done and they may ask for preferential treatment over every other party to whom money is owed.
A recent example for this is the debt taken on by the Government of Puerto Rico. The debt owners had put a condition that in case the Government defaults on their debt payments, the sales tax collected by the Government shall be claimed by them. This means that the sales tax authorities will be depositing all the tax collected straight into the coffers of the debt owners and not the Government accounts.
While this may serve as a good example of what may happen in case you make a wrong decision regarding debt funds, there are millions of good examples of these working out well for the debtors, which is why debt markets are popular and thriving! Just like a coin, everything has its pros and cons, but it finally all boils down to how you manage to handle them.