Monetizing Instruments – Using Debt

Monetizing instruments often include debt instruments which can be used to raise cash. These instruments are essentially promises between two parties in which one party agrees to give money to another and exchange for interest. Companies basically have two different ways of raising capital, through equity or through debt. In order to raise money through debt, a company must find a lender and come to an agreement regarding repayment of the loan. Debt is a popular monetizing instrument because it represents some very real benefits in terms of tax deductions for a company. When using debt to raise cash, there are a few things the company must consider.

The most important thing any company can do when considering raising cash using a debt instrument is to calculate exactly how much cash they are going to need. It can be tempting, especially for small organizations, to borrow more money than they need. Although it is common sense, many companies do not seem to realize that the more money they borrow, the more money they will have to pay back and the more they will pay in interest over the long term. The interest that comes from a loan can quickly add up and represent a surprising financial loss.

When using this particular monetizing instrument, it is a good idea to contact several different banks and lending institutions in order to negotiate the best terms possible. Some institutions will freely offer loans, but at high interest rates. The higher the interest rate, the greater the final amount the company will have to pay back. Lower interest rates provide a much higher per dollar value on the loan for the borrower, but represent less of a financial gain for the lender. Raising cash through debt can provide an essential lifeline for a struggling business, but also means it is a larger hole that the company must dig out of in order to once again reach profitability.

With the economic situation worldwide yet to recover to its former health, lending institutions and banks are less likely to borrow money to struggling companies and corporations at low interest rates. This makes shopping around for the best possible terms vitally important. While debt can prove to be a powerful monetizing instrument, it also represents a higher risk for the lender which can make good loan terms hard to come by. Once a favorable lending agreement has been reached, it is also important to remember that the money does not show up overnight.

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