Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability, Second Edition

Debt Financing

Borrowing

There are essentially four types of debt financing: (1) borrowing, (2) corporate bonds, (3) trade debt, and (4) customer deposits. The most common type of debt financing is borrowing from financial institutions, such as banks or leasing companies. Borrowing from financial institutions can be quick and relatively inexpensive.

Financial institutions borrow money at one rate and lend it out at a higher rate. The spread between the cost and the amount charged for the borrowing is how financial institutions make money. They do not set out trying to figure out how to make money on a defaulted loan. An organization that does plan to make money on a defaulted loan or places borrowers in a position where they can't retire their debt is known as a predatory lender.

Most financial institutions are regulated by licensing authorities, which have rules and regulations that prohibit predatory lending. It has been often argued that today's credit card companies do practice predatory lending, but there has been limited enforcement. Accordingly, the predominant business model is to expect orderly repayment of the loan.

To ensure payment of the loan, financial institutions consider what is referred to as the Four Cs of lending: credit, collateral, cash flow, and character. The credit component is concerned with the borrowing and repayment history of the borrower. Financial institutions like to see that the borrower has borrowed money in the past and has made timely payments. ...