Debt funds vs. Bank loans
By: Dariella Gentile
When it comes to obtaining business financing, debt funds and bank loans are often the most accessible and popular options on the market. In this article, we will analyze their differences, advantages and disadvantages, in order to make a more informed decision and define which of these sources best suits the needs and goals of a company.
Debt funds.-
They constitute a financing alternative from institutional or private investors who seek to obtain returns through the granting of business loans. Here are some of the most relevant advantages and disadvantages to consider:
Advantages:
- Diversification, because dependence on a single type of lender is reduced, a strategy that makes even more sense, at a time when credit risk appetite policies may be adjusting, thereby mitigating risks and helping to generate greater financial stability over time.
- Flexibility, as they are often “tailor-made suits” and usually have a more tailored approach to borrowers’ cash flow needs. This can be translated into payment deadlines, variable amortization schemes, types of guarantees and other related aspects.
- Approval times normally shorter due to its type of internal structure and size.
Disadvantages:
- Higher costs, because they can have higher interest rates than bank loans, since they often assume a higher level of risk.
- A more limited amount available, but in many cases they can be a source of complementary financing.
Bank credit.-
Bank credit is the traditional form of financing granted by financial institutions. Let’s look at some advantages and disadvantages to consider:
Advantages:
- Higher amounts, and this can be beneficial for companies that require significant financing for major projects or investments.
- Lower costs, due to the more efficient mix of its funding sources.
- Additional services, because they can also help the growth of the company in terms of transactions, treasury and attention to interest groups, such as employees and suppliers.
Disadvantages:
- Normally more rigorous requirements, in terms of documentation and credit history.
- Approval processes are normally slower, due to regulatory issues and internal structures.
It should be noted that the aforementioned advantages and disadvantages may vary over time depending on the economic situation, the specific circumstances of each company, the efficiency of each entity (funds or banks) in its internal processes and its human team. Likewise, it is important that, when analyzing the different funding alternatives, the policies and experience in reprofiling are clear, since in the future a modification in the initial financing conditions may be necessary, as a result of changes in the needs of the company, given the volatility of the environment.
Having said all of the above, it is essential to carefully evaluate the available options and, before making a decision, consider the financial needs and short and medium term objectives, which should be closely related to the organization’s strategic plan.
Sources:
- SYNERGOS internal cases
