Companies often need funds to stay on track and complete crucial activities. However, gathering funds is not as easy as it might seem. Banks and other lending institutions have limited funds to offer and also have strict default rules. Sometimes, a company might require additional capital, which banks might not provide.
Also, an individual investor might not have long-term funding for the company. In such a case, companies can scour a DCM (Debt Capital Market) that has unlimited possibilities. To raise funding and boost growth, companies often look for DCM support from research firms.
Read on to understand the role of debt capital markets in financing company growth.
Are you familiar with debt capital markets?
Debt capital markets provide corporate entities with a large pool of funds. Unlike traditional lending institutions, higher funds are available in debt capital markets. Also, these markets are global, which means companies can connect with a large number of investors around the world. As a result, companies can trade in debt securities to generate a vast pool of capital. Bonds, corporate papers, zero coupon, and collateralized bonds are some securities companies trade to accumulate wealth.
With debt capital markets, companies can adjust funding according to their goals. For example, a company can expand in new markets by issuing convertible bonds in debt markets. Operating in new jurisdictions is not possible with limited funds offered by a lending institution or an individual investor. Also, securities traded in debt capital markets are flexible to suit the needs of investors. They know a risk of default is associated with companies issuing debt securities. They might offer funds in exchange for flexible debt securities for the same rationale. For example, investors might trade in convertible bonds that might change into equity on non-repayment of debt.
How do debt capital markets provide growth opportunities to companies?
A company looking to achieve long-term goals must trade in debt securities. It will provide a large pool of capital the company has always been looking for. Here’s how debt capital markets help companies grow:
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Lower interests
Debt securities can help companies raise funds with lower interest. Usually, the interest on traditional bank loans is high. Besides offering low interests, debt securities also provide tax exemptions. Companies can gather funds without paying hefty interest charges every month. Companies have a chance to explore debt markets around the world to choose the best option. Enterprises can seek DCM support services from third parties for improved research and analysis.
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Fulfill long-term capital needs
Sometimes, corporate enterprises need a longer rope for debt repayment. For example, an enterprise might need funds to establish an R&D (Research and Development) department. Since it is a long-term initiative, the enterprise will require a longer rope for repayment. Once the R&D department is functional, it will save more funds for the enterprise.
Traditional banks do not allow a longer repayment tenure on business loans. Some banks offer repayment tenure of only three years for a business loan. Debt capital markets offer repayment flexibility to companies. They can fulfill long-term initiatives, which will push the organization forward in the future. With ample money, companies do not have to seek debt repeatedly. The risk of refinancing will significantly decrease with debt capital markets.
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Diversification of funding sources
Debt capital markets allow companies to diversify their funding sources. However, it is not good to always rely on traditional bank loans for funding. Banks often stop lending due to market disruptions. For example, many banks denied lending during the recent pandemic. It is because they sensed a credit risk associated with business loans during the pandemic. A company cannot stop operations in crunch market situations due to a lack of funds.
Debt capital markets provide companies with another option for capital accumulation besides traditional business loans. Debt securities can be traded even during market disruptions. Diversifying your lending sources also makes credit limits available with conventional banks. Business loans from traditional banks can be reserved for emergencies and short-term capital needs.
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Assets and ownership stay protected
When companies must be thinking of growth, they are forced to downsize due to a lack of funds. Debt capital markets do not ask companies to liquidate crucial assets or sell ownership to raise funds. If companies ask individual investors, they might ask for equity. Debt capital markets allow companies to trade in flexible debt securities. However, debt securities might change into equity on non-repayment.
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Availability of DCM support
Companies might not have analysts and financial experts to identify the right debt capital market. Luckily, third-party research firms offer DCM support services. Third-party DCM support services can give access to market reports, pricing updates, covenant reports, and more.
In a nutshell
Debt capital markets provide companies with long-term capital. They can invest the capital wisely into operations and technology that will generate revenue in the future. Also, companies can choose a lengthier repayment tenure by trading in debt securities. Finance growth for your company with debt capital markets now!
Read Also: Step-by-Step Introduction to Fixed Income Research
