All About Debt Financing To Finance Your Business

Small businesses need money to fund their business. This is especially true when the company is just beginning and is in the startup phase. Getting the money to invest in the business can be a real challenge. Funding is especially difficult because of the lending standards that are very strict. Also, getting equity financing is not easy.

Understand debt financing

Debt financing is where the borrower will borrow funds from another source. The investor will lend the money if the company owner commits to repay back the money along with interest. This could also be loans that are offered by traditional banks. The borrower will make monthly payments against the loan as well as set aside collateral. This could be real estate or an inventory. It will be used to repay the loan amount in case the borrower defaults on making the payments.

The business owner could also opt for a merchant cash advance or get investment through personal lines of credit. There could be other methods where the borrower would have to make weekly repayments or repay a part of the profit instead of making any monthly payments.

The benefits of debt financing

There are various reasons why debt financing is beneficial. The first reason is that the lender will not have any control over your business. All that the owner has to do is to pay the loan back and then the relationship ends with the financer. Also, the interest that the business owner pays lets him enjoy a tax deduction. Also, it is easy for the business owner to forecast his expenses because the payments that he needs to do is fixed and does not fluctuate.

The business owner gets to decide for himself how to spend any extra revenue that he has earned. Some lenders will have some restrictions but in most cases how you spend the money is only dependent on you. When you take a loan then this does not impact how the business will run in the long term. Also, debt financing is flexible. There are many features in debt financing that lets you decide how much money you want to borrow and also how long should you take to make the payments.

Know the disadvantages of debt financing

The negative aspect of debt financing is that it is like any other debt. Debt is thus your future ability to pay off the loan. If your company goes in a loss then it could be a meltdown or if your business does not grow as anticipated then you would still have to pay even when you are at a loss. Debt is a form of expense and this has to be incurred irrelevant of how the company is performing.

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