Debt financing is a secondary source of funding that companies frequently utilize. Debts are categorized into long-term and short-term based on their duration.

Long-Term Debt Financing

In the “borrowed funds” section of the liabilities side of the balance sheet, all debts with a contractual term exceeding one year are recorded. These debts are typically loans provided by banking and non-banking financial institutions, as well as loans from third parties. Among the most common types of long-term debts are bank loans and lease financing:

Bank Loans

Bank loans are long-term loans (over one year) granted by credit institutions to a company, which commits to repaying them by a specified due date. These loans are usually secured by collateral such as a mortgage, guarantee, or pledge, and they carry a cost in the form of interest rates.

In practice, the repayment of both principal and interest is rarely made in a single payment. The concepts of annuity and amortization rate are often used to calculate these repayments.

Annuity

When money is borrowed, repayments to the bank include both principal repayment and interest payment. These payments are referred to as “annuities,” and depending on their frequency (monthly, quarterly), they are called “monthly payments” or “quarterly payments.” The annuity formula is as follows:

A: Co * r /1-(1+r) -n ​

Where:

• Co = Borrowed amount
• r = Interest rate
• n = Number of years

For example, considering a loan of 300,000 at a 20% rate over five years, the simulation of the bank’s repayment plan in the form of an annuity is as follows:

A : 300 000 x 0,20 / 1-(1+0,20) –5 = 100 314 

The company will repay 100,314 each year for five years.

Lease Financing

Leasing is a financing method frequently used by SMEs and SMIs for their investments. It is a fixed-asset rental contract between a leasing company (the lessor) and a tenant company (the lessee). This contract extends over several years, with fixed payments from the company.

Leasing allows the company to quickly acquire an asset without immediately mobilizing the necessary funds for its acquisition, making it an advantageous form of financing for SMEs/SMIs.

Short-Term Debt Financing

Short-term financing involves the use of debts with a repayment term of less than one year. Companies typically use these resources to finance their operating cycle.

Short-term debts include short-term financial debts, trade payables, social debts, tax debts, other short-term debts, and accrued liabilities. Generally, short-term debts do not incur costs, except for short-term financial debts…

This text is an excerpt from the book “Technical Processes for Developing Investment Projects“ written by FLAVIEN TUMBULA KIAMU.

We invite you to read the following article, “INVESTISSEMENT PROJECT.”