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Throughout the different stages of a business lifecycle, companies and start-us require different types of financing to meet their operational needs and ensure future revenue generation. The funding needs at different stages may include financing business growth, purchasing equipment, or acquiring additional staff. Debt financing is one of the primary sources of funding for companies, that is, borrowing money from creditors to meet their current needs. This paper discusses the three primary sources of debt financing for a company to purchase a new building.

Borrowing from Banks and other Financial Institutions

A company can borrow funds from a bank to purchase a new building. In this type of debt financing, the business borrows a principle amount from the bank, which is to be repaid in full plus interest after a predetermined period. (Yetman, 2014). Here periodic payment is also applicable depending on the loan terms. Again, bank borrowing may require collateral, which in this case might be any of the company assets (vehicles, stock account receivables, or other buildings), especially when the loan is secured. The atypical lending rate in bank borrowing ranges between 4 to 13% depending on the amount borrowed.

Issuance of Company Bonds

Secondly, a company can also raise capital to purchase a new building by issuing company bonds to members of the public. These debt instruments are different from loans since the companies determine the interest rates on the amounts borrowed and the maturity date, unlike the case in the bank borrowing (Yetman, 2014). Here the payments terms are that the issuing company will repay the whole principal amount plus interest on the stated maturity date. In bond financing, there is no collateral required as creditors base their decisions on the company’s track record. A typical corporate bond lending rates range between 3 to 6%.

Borrowing from Commercial Finance Organizations

These organizations offer loans like banks except, they charge higher interest rates on the principal borrowed. They also emphasized on the quality of a company’s assets used as collateral to secure the loan (Yetman, 2014). Like banks, the repayment terms stipulate that the borrowed amount is paid by the end of the predetermined date plus interest.

Reference

Yetman, R. J. (2014). Borrowing and debt. Financing nonprofits: Putting theory into practice, 243-268.

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