Myths about Debt Funding

Myths about Debt Funding

Finance & Accounting

Vishal Terkar

Vishal Terkar

20 Apr 2022, 10:14 — 4 min read

For starting, expanding, or running a business, funds are of prime importance. These funds can be raised in two ways, debt and equity funding. Equity funding is raising finances by selling the shares of a company. Debt financing occurs when a company borrows money to be paid back at a future date with interest. This is available in both secured and unsecured funding. The funds can be sourced through Banks, NBFCs, or Financial Institutions.

 

But there are certain myths and misconceptions associated with how to obtain debt funding. Below are a few of them:

 

1. Funding requires high collateral

Traditionally, the debt instruments used to come up with collateral, but now it can be availed even without collateral. The collateral-free loans may have more interest rates as compared to secured ones. In the case of secured funding, the amount of collateral and the amount of loan should match. Whereas, in the case of unsecured loans, the funds are even disbursed based on the credit score of the borrower and his relationship with his banker.

 

2. The process of funding takes a longer time

The funding procedure depends upon various factors. The lender has to submit a variety of documents like KYC, financials, and specific documents. Even though the process looks lengthy, it can be arranged as fast and quickly as possible. Now the clients do not have to wait for months for disbursement, it can be done in merely days.

 

3. Only the lower amount is financed

The clients now can avail a higher number of finances too. The only restriction is eligibility. Once the client has a creditworthy score and fits into the eligibility criteria, the higher amounts can also be availed through both secured and unsecured ways.

 

4. The ROI is high in case of unsecured funding

The ROI majorly depends upon the availability of collateral, CIBIL score, and other economic criteria. The higher the ROI, the greater will be the risk, and the lower the ROI, the lesser will be the risk. Hence, the ROI totally depends and changes from case to case.

 

5. Debt funding come up with heavy risk

The loans used to be risky earlier, but today if you are doing it with the right lender, then there is no need to worry. 

 

6. Fewer products available in debt funding

This is not the truth, as there are several debt products available in the market that one can opt for and avail of services. There are conventional as well as non-conventional debt funding options. The products are chosen depending upon the financials and credit score of the clients.

 

7. No flexibility in funding

The debt funding has flexible options to carry out. Also, many services provide smooth repayment options which makes the funding work hassle-free.

 

8. You cannot use mortgaged property or assets.

Most borrowers worry about whether they can or cannot use the mortgaged property. Moreover, the property for a mortgage is either a residential or commercial one, which cannot be kept vacant or unused. As long as the borrower does not default on his or her loan payment EMIs, he or she can absolutely use the mortgaged property.

 

Also read: Investment outlook 2022: Approaches to increase success in uncertain times

 

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Image source: Canva

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy, or position of GlobalLinker.

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