One of the most common and organized ways for businesses to get money is through debt financing. Debt instruments allow businesses to get money while still keeping full ownership and control over their operations, which is different from equity financing. This article looks at the main ways that Indian businesses can get debt financing, focusing on their structural features, procedural needs, and strategic benefits.

1. Debt Funding from Banks and NBFCs: Working Capital Facilities

Conceptual Framework

Working capital financing helps businesses meet their operational liquidity needs by filling the gap between their current assets and current liabilities. Banks and non-banking financial companies offer a range of working capital products that help businesses pay for things like day-to-day costs, buying inventory, and managing accounts receivable.

Main Working Capital Tools

Cash Credit Facilities: These facilities let borrowers borrow money up to a certain amount by putting up their current assets as collateral. The interest is only charged on the amount used, which makes it a good option for businesses that need different amounts of working capital at different times.

Overdraft Facilities: These are linked to current accounts and let account holders take out more money than they have in their account, up to a certain limit. This tool is especially good for keeping track of short-term cash flow problems.

Bill Discounting: In this type of deal, banks or other financial institutions buy trade bills or invoices at a lower price, which gives businesses cash right away. The discount rate depends on how trustworthy both the drawer and the drawee are.

Letter of Credit and Bank Guarantees: These make trade easier by giving suppliers and vendors credit assurance, which lets businesses negotiate better payment terms and lengthen their working capital cycle.

Advantages in Strategy

Institutional lenders can help businesses by providing working capital financing. It gives businesses more freedom to run their operations without giving up any ownership, which means that the promoters can still make all the decisions. Section 36(1)(iii) of the Income Tax Act, 1961 says that the interest payments can be deducted from taxes. This lowers the effective cost of capital. Also, using working capital facilities in a planned way and paying them back on time improves the entity’s credit profile, making it easier to get bigger credit lines in the future.

2. MSME Loans under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

Structural Overview

The CGTMSE scheme was set up to lower the credit risk for banks and other lenders, which made it easier for them to lend money to micro, small, and medium-sized businesses without requiring collateral. The Ministry of Micro, Small and Medium Enterprises and the Small Industries Development Bank of India work together to run the scheme.

Who Can Get It and What It Covers

The plan covers both new and existing MSMEs that are involved in manufacturing and providing services. Guarantee coverage is available for credit facilities of up to Rs. 5 crore, both fund-based and non-fund-based. Depending on the loan amount and the type of borrower, the guarantee coverage can be anywhere from 50% to 85% of the approved amount.

Operational Framework

This system lets member lending institutions give MSMEs loans without requiring collateral. The guarantee trust takes on some of the credit risk. The scheme rules say that the borrower and the lending institution will split the guarantee fee, which is small.

Benefits for Business

CGTMSE loans don’t need collateral or third-party guarantees, so the business can keep its assets and use them for productive purposes. The faster release of funds is possible because of less paperwork and a simpler approval process. For lenders, the credit guarantee coverage lowers the amount of money they have to set aside according to Reserve Bank of India rules, which makes lending to MSMEs a good business. This means that borrowers can get institutional credit more easily and at lower interest rates.

3. Private Credit for Projects

Market Context

Private credit has become a new way to get money, especially for projects that don’t fit the usual banking rules or need flexible structuring. This group includes money from Alternative Investment Funds (Category II), debt funds run by asset management companies, and private credit providers from other countries.

Features of Structure

Private credit arrangements have terms and conditions that are specific to each project. Because of the higher risk and flexible covenant structure, these types of loans usually have higher interest rates than bank loans. The paperwork is very detailed and includes full security plans, financial covenants, and performance goals.

Areas of Use

Private credit is a great way for mid-sized businesses to get the money they need for infrastructure projects, real estate development, acquisition financing, and growth capital. Private credit providers don’t have to follow the same rules as scheduled commercial banks, so the approval process goes faster.

Benefits for Strategy

The main benefit of private credit is that it can be used in many different ways. Lenders can work with complicated transaction structures, subordinated debt arrangements, and covenant-lite frameworks that traditional lenders might not want to deal with. The speed of execution is much better, which makes private credit good for transactions that need to be done quickly. Private credit providers also often have operational expertise and strategic advice to offer, which adds value beyond just giving money.

4. Term Loans from Banks for Project Finance

Definitional Aspects

Project finance term loans are long-term loans that banks and other financial institutions give out to businesses for capital expenditures on new projects, expanding existing facilities, modernizing efforts, or upgrading technology. The repayment plan lasts for a long time, usually between five and fifteen years, and is based on how much cash the project is expected to make.

Framework for Assessment

Banks look at project finance proposals using full techno-economic viability studies, detailed project reports, market assessments, and cash flow projections. The Debt Service Coverage Ratio is very important. Most lenders want a DSCR of at least 1.5 to 2.0 for the whole loan period. The promoter’s contribution usually has to be between 25% and 30% of the project’s cost, which shows that they have a stake in it.

Structure of Security

A mix of primary and collateral securities backs term loans. The main security is the hypothecation of all fixed assets bought with the loan money. The collateral security could be an equitable mortgage on real estate. Banks also protect their interests by assigning project contracts, receivables, and insurance policies.

How to Pay Back

The repayment plan for project finance includes a moratorium period during the construction and stabilization phase, followed by structured installments through either equated or graduated repayment schedules. Some facilities have bullet payment structures or balloon payments at maturity, depending on how the project’s cash flow works.

Advantages over the competition

Businesses can do capital-intensive projects with term loan financing without putting too much strain on their internal accruals or equity capital right away. The longer repayment period makes sure that debt service obligations stay in line with revenue generation, which keeps cash flow healthy. When compared to external benchmarks like the Repo Rate or Treasury Bill rates, project finance loans usually have lower interest rates than unsecured loans. The structured way of financing projects also encourages financial discipline by keeping an eye on things on a regular basis, making sure that covenants are followed, and giving out money based on milestones.

5. Mergers and Acquisitions Financing: Draft Framework and Guidelines

Conceptual Foundation

Financing for mergers and acquisitions includes loans that are given to buy controlling or significant minority stakes in target companies. Due to the rise of corporate consolidation activities across industries, this type of financing has changed a lot over time.

Structures for Financing

Acquisition Term Loans: These loans are given to the buyer to help them pay for the purchase. The merged company’s cash flows or dividends from the acquired subsidiary are used to pay back the loan.

Leveraged Buyout Financing: When a company is bought by its own management or by private equity, lenders give them loans that are backed by the company’s own assets and cash flows. In these kinds of deals, the debt-to-equity ratio can be much higher, from 60:40 to 75:25.

Bridge Financing: Short-term loans that help close the gap between the end of a deal and long-term financing or asset monetization. Most of the time, these places have leases that last six to twenty-four months.

Things to think about when it comes to rules

The Reserve Bank of India has set rules for banks and other financial institutions about how to finance acquisitions. Under the current rules, banks can help people buy shares in domestic companies, but only if certain conditions are met, such as a minimum promoter contribution, enough debt service coverage, and proper security arrangements.

Important Rules for Regulation

The company that buys the other company must keep at least 25% of the acquisition cost from internal accruals or new equity. Banks must do a full due diligence check on both the buyer and the target company, looking at things like their finances, business prospects, and legal compliance status. The debt-to-equity ratio of the combined company after the acquisition should not be higher than 2:1 for sectors that require a lot of infrastructure and capital, and 1.5:1 for other sectors, unless the company can prove that it can make a lot of money.

As part of the security arrangements, the shares being bought must be pledged, and there must be enough collateral to cover them. Banks must set up clear escrow systems for how the funds will be used, and both parties must get board approval for the transaction and the loan.

Due Diligence Framework

Acquisition financing requires thorough due diligence. Financial due diligence includes looking at past financial statements, the quality of earnings, working capital, and contingent liabilities. Legal due diligence looks at things like the company’s structure, regulatory approvals, pending lawsuits, intellectual property rights, and contractual obligations. Operational due diligence looks at the risks of a business model being able to stay in business, its market position, its customer base, and its ability to integrate.

Strategic Benefits for Business Growth

Acquisition financing lets companies grow in ways that don’t involve using up their own resources or unfairly diluting their equity. The fact that you can deduct interest costs from your taxes makes the cost of acquisition more effective. Debt financing protects the return on equity for current shareholders while also allowing them to take part in opportunities for consolidation. From a valuation point of view, smart use of leverage can boost earnings per share through acquisitions that add value.

Acquisition financing also makes it easier to enter new markets, add new products to a company’s portfolio, acquire new technologies, and get rid of competitors. This speeds up business growth far beyond what would happen naturally.

Final Thoughts

Debt financing instruments give businesses different ways to get money for their operational and strategic needs while still keeping control of their ownership. Each way to get money has its own set of structural features, procedural requirements, and strategic benefits. To choose the best debt financing structure, businesses need to think about their specific needs, ability to pay back the money, and growth goals.

Using debt capital wisely, along with good financial management and following the rules, can greatly speed up business growth and increase the value of stakeholders.

It is still very important to get professional advice from chartered accountants, registered valuers, and investment bankers when putting together the best financing options and making sure that funding transactions go smoothly.