To put it simply, debt financing refers to the way that a company raises funds by borrowing. In debt financing, the enterprise needs to repay the principal and pay interest at the agreed time, so the funds raised by the enterprise are time-limited. In contrast to equity financing, creditors do not enjoy various rights such as corporate decision-making power and income rights. Debt financing channels can be subdivided into bank loans, bond issuance, convertible bonds, etc.

◆ Bank loans

Businesses opt for loan financing not only to repay the principal on a regular basis, but also to pay higher interest. In addition, when an enterprise applies for a loan from a bank, it must use certain assets as collateral. Loans are preferred over equity in terms of claims and assets to be repaid by the enterprise, and secured loans are preferred over unsecured loans.

Compared with other methods, the loan application speed is faster and more flexible. But there is a limitation of the loan, that is, the enterprise applying for the loan must have collateral or a good credit history, otherwise the bank will not approve it. In addition to this, the purpose of the loan will also be subject to certain restrictions.

◆ Issuance of bonds

Creditor's right is a kind of long-term debt and subordinate debt that requires the enterprise to repay the principal and pay interest. In the prioritization of liquidation payments, claims are ranked after loans. Therefore, in some cases, the bank will treat the debt as an asset of the lender, that is, it will not include the company's debt in the calculation of the asset-liability ratio, so that the bank can provide a higher credit line for the enterprise. Of course, there is a prerequisite for such an operation that the claim has not yet reached the due date.

Some investors will request to obtain the right to subscribe for shares when purchasing corporate bonds, so as to give priority to recovering the principal when the business is not in good condition, and purchase the company's shares at the pre-agreed price when the business is in good condition, so as to share the value-added income of the enterprise. In real life, many MBO investment funds will invest in MBO companies in this way, and in some cases, investment fund companies will also ask for voting rights.

In terms of specific application, because the state has strict requirements for the issuer of enterprise creditor's rights, the use of creditor's rights is also greatly restricted.

◆ Convertible bonds

Under certain conditions or for a certain period of time, convertible bonds can be converted into common equity. Investors who hold convertible bonds can not only share in the value-added income of the enterprise when the business is doing well, but also recover the principal and obtain interest when the business is not doing well.

For venture capital companies, convertible bonds are a very good investment tool, they often use "preferred shares + convertible bonds" to invest in start-up companies, when the start-up company is not doing well, the investment company can minimize their losses and obtain debt income; When the start-up company is doing well, the investment company can convert the bond into equity and obtain higher investment returns.

Convertible bonds are the last thing they want to see because they have to pay the principal and interest to the holders of the convertible bonds, resulting in a decrease in cash flow and an increase in the financial burden of the company. Therefore, when investors use convertible bonds to invest, financing companies must do a good job of review. In some cases, the shares purchased directly by the investor and the shares obtained through the conversion of convertible bonds may add up to more shares than the company plans to sell.

◆ Subordinate convertible bonds

Subordinate convertible bonds are at a lower grade than convertible bonds. Holders of subordinate convertible bonds do not have voting rights, but have access to financial reports, and under certain conditions, subordinate convertible bonds can also be converted into equity, and the amount of debt for which priority can be granted can be limited. In the event of liquidation of the company, subordinate convertible bonds can be the first to receive funds compared to common and preferred shares.

◆ Bridge loans

Bridge loans are a type of temporary borrowing when a business is in dire need of funds, but has not completed long-term financing. Generally speaking, bridge loans often occur before leveraged buyouts and IPOs.

Compared with other financing methods, bridge loans are risky. In the process of bridge lending, whether it is the original shareholder of the enterprise or the external investor, it is possible to require the enterprise to pledge the assets or equity of the enterprise. Therefore, the borrower will carry out long-term financing before the maturity of the bridge loan, and in order to achieve financing success, the borrower will make large concessions to the long-term financing object. To this end, enterprises must carefully consider the terms of the bridge loan before making a bridge loan, extend the loan term as much as possible, and set some conditions in advance to convert the bridge loan into a long-term loan.