Definition: Hybrid Financing is the financial instrument that partakes some characteristics of debt and some characteristics of equity. Simply, it is the financial security that possesses the characteristics of both the debt and equity.
The debt and equity are the two extreme points and in the midpoint lies the hybrid financing that offers the investors the benefits of both the equity and debt. Equity gives the right to have a residual claim on the cash flows and assets of the firm and have control over the management. Whereas, the debt represents the fixed claim over the cash flows and the assets of the firm, but generally, do not give the right to control the management.
The important forms of Hybrid Financing are Preference Capital, Convertible Debentures, Warrants, options, innovative hybrids and so on.
Types of Hybrid Financing
The purpose of hybrid financing is to offer the investors the combination of positive factors of both the debt and equity instruments. Equity instruments give the sense of ownership to the holder, and a residual claim over the cash flows while the debt instruments are issued to raise capital in the firm that could be used in its development.