Debt financing in USA

Debt financing for businesses in the United States continues to play an important role in the local economy.

Despite the rapid economic growth in East Asia and other emerging markets, the United States remains one of the world leaders in the implementation of large investment projects using advanced project finance and bank lending instruments.

In recent years, debt funding is widely used in such capital-intensive areas as energy (including the development of renewable energy sources), heavy industry, mining and processing of minerals, the oil and gas sector, as well as infrastructure and environmental projects.

GCAM Investment Group, a financial and engineering company with an international presence, offers clients flexible financing for investment projects in the United States.

Along with business funding, we provide a full range of consulting services and professional project management from A to Z.

Bank financing of business in the USA

Bank lending to business, carried out in the United States mainly by commercial banks, is of great importance, as it helps to meet the needs of business entities for borrowed funds necessary to meet commercial goals and expanded business activities.

Bank loans as a source of borrowed funds perform important social and economic tasks, allowing the rational use of free funds.

The American financial system, being one of the most developed in the world, offers numerous opportunities for business. American and foreign banks provide a variety of loans, contributing to the rapid development of the energy, oil and gas sector, mining, infrastructure and other industries.

Revolving credit line

Banks usually provide companies with two different types of loans.

The first is a revolving line of credit, in which a revolving line of credit is provided to a company to finance working capital. On the basis of a revolving credit line, borrowed money can be returned and then borrowed again in the course of business.

American banks provide revolving loans on demand or on an ongoing basis. In the first case, the bank can demand immediate repayment of the debt for any reason and regardless of whether the borrower is in default. In the presence of a revolving fixed line of credit, the bank may only claim reimbursement after the maturity date or in the event of a delay in payments by the borrower.

Payments for this type of service are made through advance payments of the borrower or by opening a letter of credit.

Interest rates currently offered by banks for business on revolving credit lines may include interest rates based on LIBOR (London Interbank Offered Rate). Loans are provided by US banks only in US dollars, however some banks may provide currency hedging products to protect companies from currency fluctuations.

Revolving lines of credit are structured according to a formula that makes the availability of credit dependent on the constant value of certain assets that serve as collateral for the debt. Typically such assets include accounts receivable, inventory, equipment and real estate.

The amount available to the company must be less than the declared limit of the revolving credit line and not exceed a certain percentage of the value of the borrower's assets.

This is a strict condition in the United States, in contrast to a number of other countries where the amount of available credit cannot be affected by fluctuations in the value of assets after the opening of a revolving line of credit.

American banks require as much collateral from the borrower as possible, and also strive to obtain reliable guarantees.

Thus, business loans and collateral instruments are usually subordinated and tied to a bank.

Banks also have strict requirements for asset insurance.

Short-term loans for business

Banks can also provide short-term loans.

Short-term loans are usually used to acquire specific assets or provide additional working capital to a company based on the present value of existing assets (eg equipment).

Unlike a revolving credit line, a short-term loan is issued immediately in full and repaid on time in accordance with the agreed schedule. Banks may require all assets of the borrower as collateral, especially if the bank also provides the company with a revolving line of credit.

The additional security measures described above and loan guarantees also apply to short-term loans. In some cases, the bank may also require additional security in the form of a letter of credit. In addition to interest rate options such as base rates or LIBOR rates, banks also offer fixed rates for short-term loans.

Short-term business loan agreements with a fixed interest rate may include a prepayment penalty if the borrower repays the loan early or if the repayment is accelerated by the bank.

Long-term investment loans

Implementation of investment activities in the real sector of the economy is a complex process, because business not only needs to directly implement projects, but also needs to attract adequate funding sources.

The participation of American banks in the investment process is expressed primarily in investment lending.

In the United States, a significant proportion of investment projects are financed through bank loans. The benefits of long-term bank loans for American businesses are undeniable. First, the company can repay the principal over a long period of time. A long-term bank loan allows a business to use significant funds and repay it in small installments on a regular basis. In addition, companies have the opportunity to pay off their existing debt with the money that was earned as a result of the introduction of new technology or by financing long-term investment projects.



The share of IC in total GDP in the United States is higher than in most countries of the world, and reaches 10%.

Local companies are actively raising bank funds for the development of their projects, therefore, investment lending in the United States has a significant impact on GDP.

In addition, investment lending accounts for a large share in the total volume of investments in fixed assets. More than 50% of investments are carried out at the expense of borrowed funds from banks. One of the reasons is that US banks offer favorable interest rates and simple lending terms.

In addition, the government supports investment activities, especially in priority sectors.

American banks

The US banking system is characterized by a multitude of public financial institutions that fund businesses nationally and regionally.

The US banking system provides a wide range of financial business opportunities.

Loans can be obtained from any of hundreds of financial institutions, starting with financial giants such as Chase Bank, Bank of America, Wells Fargo and others.

The choice between a large financial institution and a regional bank will depend on the specific needs and services expected by the borrower. For example, some regional banks may specialize in banking services for a particular industry (for example, loans to the petrochemical industry).

Banks of large financial centers usually have strong positions in the international financial market and are constantly expanding their network of foreign representative offices. Cooperation with such banks can provide business with useful local contacts, which is of great importance for a foreign investor considering the implementation of large investment projects in the United States.

Foreign banks in the USA

There are currently many foreign bank branches in the United States.

Branches of foreign banks are almost exclusively involved in commercial banking. When a new company is formed in the United States, the branches of the foreign bank can provide the necessary financial cooperation with the foreign investor and the main bank in his country.

The list of the largest branches of foreign banks in the United States is made up of such financial institutions as Deutsche Bank (Germany), Mizuho Bank (Japan), Royal Bank of Canada (Canada), MUFG Bank (Japan), Societe Generale (France), Credit Agricole (France), Credit Suisse (Switzerland), BNP Paribas (France) and others.

In addition to American or foreign banks, business debt financing the United States can also come from non-bank financial institutions.

Under certain circumstances, financing of fixed assets can be provided by the manufacturer or a third party through leasing instruments.

In some cases, the company may use the services of a factoring company to improve its financial health. The factor may acquire the receivables of the company and will make every effort to recover the debt with recourse or limited recourse, depending on the specific agreement.

An additional source of debt financing can be funds received from so-called mezzanine lenders.

Mezzanine financing is more expensive than interest on debt, but it may be the key to leveraged financing for an acquisition.

Choosing the best option of business funding

Effective management of a company's finances is linked to the development and implementation of a financial strategy.

Debt financing of business in the United States is a well-developed instrument with a long history that ensures the development of business in a highly competitive environment.

According to the Federal Reserve and the Securities Industry and Financial Markets Association, the total corporate debt of American companies has already exceeded $ 10 trillion, and this is far from the limit. Low interest rates in the United States allow companies to actively use borrowed funds for their current activities and future projects, but this is not the only factor to consider.

The capital structure of an enterprise is the main indicator of its financial health, as well as an indicator of its ability to function effectively in a competitive environment. One of the main business problems is the question of determining the optimal balance of funding sources.

Today, both in theory and in practice of business entities, there is no single universal approach to determining the factors of influence on the capital structure of an enterprise.

Company managers need to determine from which sources of financial resources the capital of the enterprise will be formed. The financial condition and the prospects for the financial and economic activities of the business in the future will depend on this. Optimization of the capital structure is a process of permanent adaptation of an enterprise to changes in the environment of its functioning in accordance with changes in trends in the economic system. Debt financing plays an extremely important role in this process.

The choice of sources of business debt funding is based on a comparison of costs, tax effects, potential conflicts of the parties, legal restrictions, current market indicators, etc.

Most often, American companies use the following debt instruments:

• Bonds that provide for the attraction of significant financing for ongoing operations and the implementation of large projects. Historically, the United States has always been the world center of the corporate bond market, so this instrument is widely used by local companies.

• Bank loans providing large sums of money, including with the possibility of prolongation (revolving loans, targeted loans). A strong banking system with a long tradition and a reliable financial base opens up ample opportunities for business financing at home and abroad.

• Leasing, the benefits of which for US companies can be tax benefits and accelerated depreciation.

• Commodity loans (for example, the supply of strategic products under a special contract in some industries, such as agriculture).



When analyzing the effectiveness of the choice of debt financing instruments, special attention is paid to the ratio of risks and the assessment of the benefits of investors (capital owners), primarily the achievement of strategic goals and the growth of the company's value.

When implementing any investment project in such a competitive market as the United States, the company faces a number of operational and financial risks that require the right choice of financing model.

Operational risk is the volatility of cash flows and the business environment of the company.

Financial risk arises mainly from the attraction of borrowed funds.

The company's challenge is to direct the business process in line with the objectives of the business strategy.

Properly organized debt funding will help to maintain control, increase profits, move to a higher level of return on equity (ROE), create a tax shield, resolve conflicts between project participants and provide positive signals for potential investors.

The negative attitude towards debt financing instruments in the United States is sometimes caused by such objective disadvantages as the instability of financial flows and additional costs associated with debt servicing (especially for long-term capital-intensive projects with a high level of risk and uncertainty). Therefore, professional financial modeling helps companies to select the optimal level of debt financing.

For example, the WACC minimization method using credit ratings to assess risk, the AVP method with the introduction of estimates of the costs of financial difficulties, the D / V regression method (share of insiders, profit volatility), the EPS maximization method and the EBIT-EPS method are widely used by American companies.

An important indicator of the effectiveness of a financial strategy when using debt funding instruments (since they are associated with accepting a greater risk) is the change in the company's value.

The most relevant in this case is the ranking of funding sources by the level of attractiveness.

Internal sources of business financing

The sources of financial resources are all the income that the company has in a certain period and which are used to implement projects and cover current expenses.

Such expenses can be wages, business expansion, fulfillment of financial obligations, special reserve funds, etc.

The production of any goods, services, benefits is associated with costs. Sources of business finance in the United States have evolved over the centuries, and over this historical period they have become extremely diverse. In general, these sources are subdivided into equity and debt capital. Equity is the main source of funding for American companies. It includes the authorized capital, retained earnings and other receipts (targeted funding, donations).

The authorized capital represents the initial funds invested by the founders to ensure the life of the company.

The founders can use any material assets, including buildings, structures, equipment, raw materials, securities, as well as intangible assets.

If it becomes necessary to liquidate the company or withdraw a participant, the founder usually has the right only to compensation for his share within the residual property, but not to return the assets that he transferred as a contribution to the authorized capital. Thus, the authorized capital reflects the company's obligations to investors.

Benefits of using equity capital:

• Ease of raising funds, since decisions to increase it are made by the owners without the participation of other economic entities.

• Relatively stable profit from all types of activities of the company, since when using equity capital there is no need to pay interest on a loan or interest on bonds.

• Ensuring the financial stability of the company's development and its solvency in the long term, which is achieved primarily through retained earnings.

The disadvantages of using equity capital without borrowing are listed below:

• Inefficiency in cases of seasonal production.
• Limited opportunities when expanding business activity.
• Relatively high cost.

External sources of business funding

An enterprise using only equity capital has high financial stability.

However, American companies that follow this path significantly limit the pace of their future development, since they are deprived of a flexible and highly mobile source of asset financing. This is especially true for companies that implement large-scale investment projects.

To cover the need for fixed assets and working capital, local companies most often use bank loans.

Such a need may arise for reasons beyond the control of the enterprise. Among these reasons may be a violation of obligations by partners, force majeure, urgent modernization and technical re-equipment, lack of sufficient start-up capital, seasonal decline in production and other reasons.



External sources of business financing are temporarily free funds from other companies, households, and in some cases from the state. Borrowed funds in developed economies are widely used to finance the development of an enterprise on a repayable basis.

This broad group includes loans from banks and financial institutions, leasing instruments, debt securities and much more.

Borrowed funds can be provided to enterprises for the following purposes:

• Construction, expansion, reconstruction and re-equipment.
• Purchase of movable and immovable property.
• Implementation of environmental protection measures.
• Working capital replenishment (short-term loans).

The rapid scientific progress of the United States and fierce competition require constant efforts from local businesses to maintain market share, which in practice means capital-intensive activities, including R&D and the implementation of large projects in various fields.

For this reason, American business needs not only short-term financing, but also long-term loans (including leasing and various bank investment loans for a period of five years or more).

The benefits of using borrowed funds for American companies include:

• Relatively low cost of capital compared to equity due to the tax shield.
• Ensuring rapid modernization of the enterprise and increasing growth rates.
• Ample opportunities to attract borrowed funds on the most suitable terms for business.
• Increase in the ROE due to the financial leverage in case of a successful investment.

Disadvantages of using borrowed funds include the following:

• Attraction of borrowed funds in large volumes gives rise to the most dangerous financial risks for the company, such as a decrease in financial stability and loss of liquidity.

• Strong dependence of the enterprise on external conditions (alternative funding sources).

• Limited opportunities to attract financing from other business entities.

• The complexity of the formal procedure for raising borrowed funds, including the need to submit an application and a package of financial documents to the bank.

American companies that widely borrow funds in the form of a bank loan or bonded loan have a higher financial potential for economic growth and increase in the return on equity.

Business debt financing in the United States is well developed thanks to a strong and diverse financial system with a long history and a solid legal framework.

In spite of all the advantages of debt funding, such an enterprise may be exposed to financial risks and the threat of bankruptcy if the share of borrowed funds in the balance sheet liability exceeds 50%.

These and many other aspects should be taken into account when deciding on the choice of a source of financing, especially in times of crisis and uncertainty.

If you would like to get professional help in financing a business in the USA or other countries, contact GCAM Investment Group anytime.