Types of Private Debt
Individuals or companies borrowing for public debt can use several financing techniques. These techniques can differ in characteristics and advantages. The most common types of personal debts are given below:
1. Corporate Bonds
Corporate bonds can be defined as a type of private debt securities that are borrowed by corporations to raise their capital from the public markets. Corporate bonds differ in terms of risk and yield. The lending party provides money to corporations for a specific period with prespecified interest payments. For example, boAt issues some corporate bonds to raise funds to expand its product line. Such types of bonds are traded on the open market and they pay a fixed rate of interest.
2. Mezzanine Financing
Mezzanine financing can be defined as a type of private debt that is used by companies and organizations that are preparing for an Initial Public Offering(IPO). Mezzanine financing consists of features such as convertible notes. Such type of debt is considered more risky than senior debt. Such types of public debts are more costlier than traditional methods of bank loans. For example, A software company uses mezzanine financing from a private financial institution for faster growth and development. Such debts are a combination of equity debts and subordinated debts.
3. Senior Secured Debt
Many times, the individual or business organization borrowing private debt thinks of the security of their assets. Senior secured debt thus provides the security of the assets which states that the lender of debt has claimed on their specific investments. Senior secured debts are mainly less risky for investors. The interest rate for senior secured debts is also less as compared to other types of private debts. For example, A sugarcane insert issues senior secured debt from a financial institution of the country. They want to make use of this debt for the construction of a new plant. Therefore the lender claims for the assets of powerplant by default.
4. Junior Debt
Junior debt is a type of private debt that is considered less priority than senior secured debt. The parties holding debt need to pay the amount after senior secured debt in case of bankruptcy, financial distress, or any financial war-like conditions. The investors offer high interest rates in case of junior debt because they are highly prone to risks. For example, A retail company issues junior debt for their company in the form of subordinated bonds for their market expansion. Further, in any case of financial difficulties, these bonds will be paid after the senior debt holders.
5. Uni-Tranche Debt
Uni-tranche debt is a combination of senior secured debt and mezzanine financing debt. Uni-tranche debts are types of debts that are provided by a single user only. Uni-tranche debts are less risky as compared to mezzanine financing debts and are more secure in terms of assets. As Uni-tranche debts are hybrid they are more expensive as compared to senior secured debts. For example, a hotel group secures their Uni tranche debt from financial institutions or from private equity firms to renovate their place. This debt will be then backed by the assets of the hotel and a combination of senior secured debts and mezzanine financing.
6. Asset-Based Lending
Asset-based lending is a type of private debt that is secured through the assets of the borrower. This asset can consist of inventory, equipment, tangible assets, etc. Lenders make use of the assets of the borrower so that it would be a less risky process. Asset-based lending is majorly used by most companies and organizations to finance their working capital needs or to finance their specific projects. For example, A transportation company makes use of asset-based lending for financing their vehicles. In such type of debt, the lenders will then provide a revolving credit line that is based on the inventory and receiving account value of the company.
7. Real Estate Financing
Real estate financing is defined as a type of private debt that is used for purchasing or developing any residential or commercial properties. Real estate financing has multiple forms such as commercial estate loans, construction loans, mortgages, etc. In real estate financing the terms of financing differ from one other. It is majorly based on the type of real estate. For example, a property firm takes real estate financing for purchasing their office building. This type of debt can consist of a commercial real estate loan in which the property will serve as collateral.
8. Leveraged Loans
Leveraged loans are defined as a type of private debt that is extended to organizations, companies, or individuals along with a very high amount of debt. Leveraged loans are majorly used to finance mergers, acquisitions, and other types of investments. Leveraged loans generally have high risks therefore to attract lenders borrowers offer high rates of interest. For example, A retail company can take leveraged loans to support its expansion in multiple regions of the country. This loan will be then secured by the assets of the company.