Debt Financing is a strategy that involves borrowing money from a lender or investor with the understanding that the full amount will be repaid in the future, usually with interest. Small businesses that employ debt financing accept a direct obligation to repay the funds within a certain period of time.
Debt Financing can be on a short-term or long-term depending on the period of repayment.
Dairyborn Foods Ltd. Factory is located in Dairyborn Way, Eaton Green Road, Luton, Bedfordshire, England, United Kingdom.
The company offers cheese products for food manufactures and has employees of between 21- 100.
Dairyborn Foods has become a very successful in cheese business and in recent years was sold for in excess of £ 20 million.
According to the managing director, when cash tight, the feature of Dairyborn Foods was that the product cheese was relatively simple one and rarely the cause of disputes with his customers but what was an issue was that his customers were taking between 60-90 days to pay.
As the business grew its sales from £1 million towards £ 20 million, cash becomes a real problem, so Dairyborn Foods Ltd has to look for a way to finance its growing business, and the best option is to look for debt financing.
As a way of financing the business, I would propose that in the short-term it would be appropriate for the company to go for Overdraft from the bank as this has traditionally been much of the way United Kingdom companies finance their business as it is a most flexible banking facility offered.
Overdraft as a form of short-term debt financing can be a good option to finance the Dairyborn Food ltd business because the facility is appropriate for financing working capital which the company is lacking most. Since the business is growing too fast the company needs to finance its working capital through an Overdraft from its bank.
Another form of short-term debt financing that I would propose to the Dairyborn Food ltd is the Invoice discounting.
By opting for the Invoice discounting as a means of short-term debt financing, Dairyborn Food ltd would exchange sales invoice for cash from its bank but would retain full control over its invoicing and debt collection and bad debt protection can be provided as part of this package. Since the company's customers were taking between 60-90 days to pay their debts, it is important for the company to opt for Invoice discounting as a short-term alternative to finance their business.
Another reason to propose Invoice discounting as a way Dairyborn Foods ltd to could finance its business is that the company already has a pretty efficient accounting department so thy had so they had only to raise an additional copy of the invoice and send that to the bank which would then release 80% of the invoice value with in seven days which eventually would be a much speedy way to raise cash to finance the growth in the business.
However, there are other long-term debt financing potions I would propose to Dairyborn Foods ltd to finance its growing business and these are:
Bank loans: This is an important source of long term finance as banks do lend sums over a longer period of time possibly up to 25 years or even more.
This would be of greater important to Dairyborn foods ltd as it provides the company with a greater degree of financial freedom and the debt obligations are limited to the loan repayment period after which the bank has no further claim on the business.
Bank loans generally lack of the complex reporting requirements that are so common with some forms of equity financing. By lacking this complex reporting it make me propose this to Dairyborn foods ltd as a way of long term debt financing.
Bank loans are also quicker to obtain than other forms of debt financing like the equity financing and even the legal cost are low compared to equity financing. Because of this reasons therefore I would propose the Bank loans to the company as a source of long term debt financing.
Trade credit: Is also another source of long term debt financing I would propose to Dairyborn Foods ltd as the company will delay payment on the products it purchase.
I would propose trade credit to Dairyborn Foods ltd as a source of long term debt financing because it puts off expenses while increasing revenue to the company. This will give the company much more revenue it needs to finance its business.
As a source of capital investment to a small business like Dairyborn Foods ltd, if use properly, trade credit can provide not only a useful means to increase capital but also a way to build a commercial credit history, because on-time payment shows a record of financial stability and success. For this reason therefore will make me propose trade credit as a source of long tern debt financing.
Overall, debt financing can be a valuable option for a small business like Dairyborn Foods ltd that requires cash to expand their operations but experts warn that carrying too much debt can cause a small business to encounter severe cash flow problems. Instead, it is best to use a combination of different forms of financing in order to spread the risk and facilitate future funding efforts.
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