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Private Debt Financing Has Become a Popular Choice of Financing Solution for Many Private Companies. See How It’s Done Below
Over the recent decade, private debt financing has become increasingly popular for private companies worldwide, and the Indonesian market is not an exception. Private debt accounted for more than 30% of Indonesia’s Nominal GDP in December 2020 – the number significantly increased over the years, which was contributed by small and new companies in the country. If you are a private business owner, you would know how generating capital for expansion and growth can be challenging and time-consuming. Learning about the intricacies of private debt financing for Indonesian companies and how it can bring your company to the next level may be useful for you. See more below.
Understanding Private Debt Financing
When a private company needs to raise working capital, they do not have the option to put their stocks on the market. Therefore, these companies oftentimes turn to private debt financing from institutions such as insurance companies, credit platforms and hedge funds for a loan. The loan given by the financial institutions must be paid back with interest on a mutually agreed upon date.
Is Private Debt Financing for You?
To decide whether or not private debt financing is for you, many criteria need to be considered. Among them are:
Pros:
- Raises capital instantly.
Companies that need to raise funds in a short amount of time should consider private debt financing. - The lender does not have a claim on future profit.
The deal is done between you and the lender when you have finished paying off the loan along with interest. The lender will not claim if (or when) your company makes a profit in the future after the business relationship ends. - The lender does not have ownership of the company.
Private debt financing does not require you to give up any ownership of your company. This would mean that you will have complete control and decision-making powers over your business without any third-party interference.
Cons:
- Repaying debt with interest.
The debt you borrowed will be charged with an interest, which can be high. If you are not making enough profit, the debt plus interest can be financially burdening to your company. - Need to put up collateral.
Collateral is usually asked to be put upfront in a loan to protect the lender. In most cases, an asset (even a personal asset) will be required to guarantee if the loan given is in a high amount. Also, note that your asset can be seized if you fail to pay the loan in time. - It can affect your credit score.
Like other types of loans, if you do not pay your loans properly, it could affect your credit score. This can make it harder to apply for alternative financing options in the future.
Make an Educated Decision
Private debt financing may sound great on paper – but at the end of the day, debt financing can pose a risk to your business, and you may find yourself in deeper trouble than before. Understanding private debt financing is not enough; you need to study its applicability and impact on your business. To make a better-informed decision on private debt financing, you can always engage a banker to assess your business’s current state and the possible outcomes of private debt financing on it.
