All the Types of Debt in Corporate Finance: A Complete Overview
- Graziano Stefanelli
- 5 days ago
- 3 min read
Debt is one of the most powerful tools in business finance.
It enables companies to fund growth, smooth out cash flow, invest in opportunities, and manage working capital. But not all debt is the same...
1. Term Loans
What it is: A lump sum borrowed from a lender, paid back over time with interest.
Types:
Short-term loans (usually under 1 year)
Medium-term loans (1–5 years)
Long-term loans (5–30 years)
Best for: Equipment purchases, expansion, acquisitions, or refinancing.
Pros: Predictable payments, structured repayment.
Cons: May require collateral; less flexible.
2. Lines of Credit
What it is: A revolving credit facility allowing businesses to draw funds as needed, up to a limit.
Best for: Managing short-term cash needs, seasonal fluctuations, or working capital.
Pros: Flexibility, pay interest only on what you use.
Cons: May have fees; can be revoked; tempting to overuse.
3. Equipment Financing
What it is: A loan specifically for purchasing equipment, where the equipment itself serves as collateral.
Best for: Machinery, vehicles, tech hardware.
Pros: Preserves cash; asset-backed.
Cons: Tied to specific assets; risk of depreciation.
4. Commercial Real Estate Loans
What it is: Loans used to purchase, develop, or refinance commercial properties.
Best for: Office space, warehouses, retail locations.
Pros: Long terms; often fixed interest.Cons: Large down payments; collateral risk if property value drops.
5. Invoice Financing / Factoring
What it is: Borrowing against accounts receivable; can involve selling the invoices (factoring) or using them as collateral (invoice financing).
Best for: Improving cash flow when waiting for customer payments.
Pros: Fast access to cash.
Cons: Expensive fees; dependency can grow.
6. Merchant Cash Advances (MCAs)
What it is: An advance on future sales, repaid as a percentage of daily or weekly revenue.
Best for: Businesses with high card sales and limited financing options.
Pros: Fast approval, minimal paperwork.
Cons: Very high effective interest rates; cash flow pressure.
7. Trade Credit
What it is: Informal debt between businesses, where a supplier allows delayed payment (e.g., net 30/60/90 days).
Best for: Inventory purchases, ongoing supplier relationships.
Pros: No interest; improves working capital.
Cons: Late payments can damage relationships or affect credit scores.
8. SBA Loans (U.S. specific)
What it is: Government-backed loans for small businesses, offered through banks with partial guarantees by the Small Business Administration.
Best for: Startups and small businesses needing capital.
Pros: Lower rates; longer terms.
Cons: Lengthy application; strict eligibility.
9. Convertible Debt
What it is: A hybrid of debt and equity, often used in early-stage funding, where the lender can convert the debt into equity.
Best for: Startups raising capital from investors.
Pros: Delays valuation; investor alignment.
Cons: Dilution risk; complex terms.
10. Mezzanine Financing
What it is: A mix of debt and equity, often used in leveraged buyouts or growth-stage financing, subordinated to senior debt.
Best for: Mature companies needing growth capital.
Pros: Less dilution than equity; flexible terms.
Cons: Higher interest; riskier for lenders.
11. Subordinated Debt
What it is: Debt that ranks below other loans in case of bankruptcy; higher risk, higher return.
Best for: Companies layering debt or in complex capital structures.
Pros: Can attract investors looking for yield.
Cons: Riskier for lenders; may require higher interest.
12. Personal Loans / Founder Loans
What it is: Debt personally taken by founders or guaranteed using personal assets.
Best for: Early-stage businesses or when credit access is limited.
Pros: Quick access; no external investor involvement.
Cons: High personal risk; limited size.
Choosing the Right Debt Type
Each type of debt has its place in a smart financing strategy. The choice depends on:
Purpose of the funds (growth vs working capital vs emergency);
Business stage (startup vs mature);
Cash flow predictability;
Risk appetite and leverage capacity;
Lender relationships and credit profile.
Diversifying debt sources and structuring your capital intelligently can fuel growth without compromising financial stability.
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