Different Types of Debt

Debt financing can take many forms, each with distinct structures, purposes, and implications for both the borrower and the lender. Understanding these types helps companies select the right capital solution for their needs.

Key examples:

• Secured Debt: Backed by specific assets (e.g.,equipment, receivables). Typically offers lower interest rates due to reduced lender risk.
• Unsecured Debt: Not backed by collateral. Carries higher interest rates and is often based on the borrower’s credit profile and cash flow strength.
• Revolving Credit Facilities: Flexible lines of credit that allow borrowers to draw, repay, and re-borrow up to a set limit. Commonly used for working capital management.
• Term Loans: A lump sum loan repaid over a fixed schedule. Can be short, medium, or long-term depending on the use case. Ideal for funding expansion, acquisitions, or capital expenditures.
• Convertible Debt: A hybrid instrument that starts as debt but can be converted into equity under predefined conditions. Often used in early-stage financings.
• Subordinated (Mezzanine) Debt: Ranks below senior debt in repayment priority. Offers higher yields and often includes equity-like features (e.g., warrants). Used to bridge capital gaps or in leveraged buyouts.
• Asset-Backed Lending (ABL): Loans secured by a company’s assets, such as inventory, receivables, or IP. Common among companies with valuable but illiquid assets.
• Bridge Loans: Short-term loans designed to "bridge" the gap until longer-term financing or an anticipated liquidity event. Typically higher interest and quicker repayment terms.
• Revenue-Based Financing: Repayments tied to a percentage of monthly revenue, rather than fixed installments. Useful for businesses with recurring revenue and growth variability.
• Senior Debt: Holds the highest repayment priority. Typically secured, with the most favorable terms for the lender.
• Junior Debt: Ranks below senior debt but above equity. May be unsecured or secured by secondary collateral.