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Introduction
Generally, running a successful business requires capital, which can be acquired in many ways. One of the ways includes loans (financial debts) which can be obtained from banks or finance. Consequently, there has been a rise in finance companies since 2008 after the financial crisis. This paper will critically analyze debt financing as a source of capital for a healthcare organization, evaluating various types of debt financing and looking at how credit rating will affect debt financing.
Debt Financing
Capital is required for running any business; as previously stated, business financing can be achieved in either of the following ways; through debt financing or equity financing. Debt financing is obtaining money through fixed-income products like bonds, bills, or notes, whereas equity financing entails giving up ownership shares. Abdulrahman et al. (2020) compared business financing to personal debt, saying they should be viewed in the same way, as opposed to Gopal & Schnabl (2022), who based their hypothesis on the fact that personal debt and company debt are fundamentally dissimilar.
Types of Debt Financing
Debt financing comes in a variety of forms; the following is a quick summary of a few of them:
- Commercial Loans: It is debt-based funding between a debtor and a financing company, either a bank or a financing company (Gapenski & Pink, 2015). It usually requires the debtor to give collateral to the bank, which the bank will confiscate after the borrower defaults in payment or goes bankrupt.
- Cash Flow Loans: Cash flow loans differ from commercial loans because they do not go through traditional bank formalities. Hence, this calls for a more in-depth examination of the company’s financial standing, including credit history (Gopal & Schnabl, 2022). Instead, financing is nearly entirely based on the company’s ability to provide cash flows. The majority of business credit is made up of cash-flow loans. However, a cash flow loan has a higher origination fee and is charged more for late payments than a conventional loan (Gapenski & Pink, 2015). A cash flow loan should be repaid as soon as possible because it is a drain on the finances of a small business that has no other options for obtaining financing.
Effects of Credit Rating on Debt Financing
Credit rating can be the rating of a debtor’s ability to pay his/her debts in a specified amount of time. A credit agency does credit rating by evaluating the qualitative and quantitative value of the organization/entity in question (Cole & Sokolyk, 2018). Debtors use credit ratings to gauge the safety and security of their debt issued to creditors, including banks, finance businesses, and the government (Gapenski & Pink, 2015). Hence, if a business/ organization has a low/poor credit rating per the credit agency rating, it may become difficult for the organization to acquire debt financing.
Conclusion
In conclusion, debt has been instrumental in the development and growth of many regions in the industrialized world. Since the lender has no say in the business’s daily operations, debt financing has become increasingly popular. Therefore, once the debt is paid in full, the borrower and the lender have no further dealings with one another (Gapenski & Pink, 2015). Unlike equity shares, where the lender keeps some stake in the company, debt shares are issued to the borrower. The primary issue with debt financing is that the debtor takes on the loan with the mistaken belief that he or she will always have sufficient funds to pay all of the company’s expenses, including the interest and principal.
References
Abdulrahman, B. M. A., Yahia, A. E., Abdalrhman, H. A., & Helal, T. O. A. (2020). The effect of debts on economic development. Academy of Accounting and Financial Studies Journal, 24(3), 1-8.
Cole, R. A., & Sokolyk, T. (2018). Debt financing, survival, and growth of start-up firms. Journal of Corporate Finance, 50, 609-625. Web.
Gapenski, L. C., & Pink, G. H. (2015). Understanding healthcare financial management (7th ed.). Health Administration Press.
Gopal, M., & Schnabl, P. (2022). The rise of finance companies and fintech lenders in small business lending. The Review of Financial Studies, 35(11), 4859-4901. Web.
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