A Company could raise finance from debt market by issuance of debt securities in the form of Commercial Paper, debentures/Fixed Deposits (NBFCs), Inter Corporate Deposits (ICDs) and Medium Term Notes. Another way of raising funds is to avail finance from Banks/Financial Institutions. While long term funding could be raised from Banks as well as Financial Institutions, working capital requirement could be extended by Banks only. Vendor Finance, Channel Financing and Securitisation are other specialized forms of debt financing.
Debt securities could also be traded in the market or transferable on endorsement and delivery. Let us look at diverse debt securities features:-
Commercial Paper: This instrument is issued by Corporate for raising short term finance ranging from 90 days to 12 months.
Bonds/Debentures/Inter Corporate Deposits: These are instruments for raising funds for the period of more than one year to 5/7 years. The debenture issuance could be secured/unsecured in nature. These type of debt has a wider investor base with instruments carrying a zero coupon rate or fixed rate or floating rate payable at regular intervals, if applicable.
Medium Term Notes: The debt finance is raised for longer term up to 30 years by issuing MTNs.
Bank Finance could be availed from a single Bank or Consortium of Banks. A corporate could avail finance from the Bank in various forms depending upon its requirement. Bank finance is generally secured in nature and carry interest payable monthly/quarterly that is linked to MCLR/PLR/Base rate.
Overdraft: This is advance availed that is repayable on demand. This facility is short term, which could be renewed post completion of 12 months.
Term Loan: This type of advance is availed for buying an asset in the form of land, building, Plant & Machinery. This loan is repayable over medium to long term in installments, which carry fixed/floating rate of interest.
Revolving Facility: Such facility is in the form of a running account where limit is sanction and withdrawals are allowed to the extent of drawing power or sanctioned limit, whichever is less. The interest is charged on the finance outstanding in the account, and this facility is also for short term of 12 months, renewable subject to conditions.
Bill Discounting Facility: Banks sanction bill discounting facility to the Corporate for short term lending. Corporate has to tender bill of exchange, Invoice and transport receipt for availing finance.
Interest rates for all the facilities are decided based on the internal rating assessment system of Banks/FIs, covering parameters such as track record of borrower, financials and securities offered. There could be a component of processing fees on the amount of loan/advance sanctioned.
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