5 Types of Private Debt You Must Know

Types of Private Debt.All companies need economic resources to finance their activity.Private debt is a form of financing complementary to conventional channels for small and medium-sized companies, which consists of the issuance of debt assets by private companies.

Private debt is often used to finance large projects in SMEs , either to expand business volume, make acquisitions, cover certain shareholder changes or develop international expansion plans .

Types of Private Debt You Must Know

There are different types of private debt. Senior and junior loans are the most common, although these are also presented under different formulas since one of their main characteristics is precisely a high level of customization to adjust to the financing needs of the company .

Senior debt.

These are loans that are generally granted to companies that have a credit rating granted by external rating agencies such as Estandar & Poor’s, Moody’s and, recently in the Spanish scene, Inbonis Rating . They are usually loans that pay a lower interest rate, since the risk exposure is low. In fact, it is usually a secured debt, with a double guarantee, backed by the assets of the company and with a preferential right of the lender over the rest of the creditors, in case the business goes bankrupt .

Junior debt.

This type of private debt, also called unsecured or mezzanine, is not tied to any asset. Normally those companies that do not have a credit rating or this is bad, or that due to their level of indebtedness or business plans, cannot be financed by resorting to bank loans or senior bonds. As the risk represented by this operation is higher and has a lower repayment priority than senior debt, your interests are higher . They also tend to have longer repayment terms or even no maturity, in which case they are called special subordinated bonds.

In summary, private debt can be a good long-term financing alternative for those SMEs that have a good volume of business and have expansion plans . Not only does it allow you to avoid being overly dependent on bank credit, but it tends to offer more flexible conditions, the possibility of making greater leverage and betting on longer repayment terms or even returning the capital at the end of maturity.

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