Debt financing is a popular option among business people where to obtain resources to finance their business. While debt has a negative connotation in its general term, it has a positive level of meaning among startup level companies. Even bigger corporations have debts that keep the health of their business operations and expenses. In this sense, debt is viewed as leverage where debt financing institutions are regarded as a capital source of growing a business.
Debt financing for business solutions
Debt financing is viewed with advantage features by entrepreneurs. The process involved getting a source of fund to finance your business operation whereby a lender, usually a bank or other financial lending institutions, offers to lend money with the payment of an interest rate within a certain period of time. An advantage feature of debt financing is the business owner retains their ownership of their business. Corporations and business establishments also enjoy tax deduction from debt financing whereby the debt is considered as part of the business expenses that are treated as income tax deductibles. One can also enjoy reduced interest rate from their loans.
Debt financing considerations
Before you resort to debt financing it is crucial to view the potential risks and downsides of taking out this financial option. Debt financing will not relieve you from your financial obligation even when your business becomes unproductive. The interest rates from various debt financing institutions vary and it may depend upon your personal and business credit history. Moreover, each debt that you have will be reflected upon your credit rating. That is why you can weigh the impact of taking out a debt from your credit rating record. In some instances, you will be asked to put up a collateral for your loan thereby giving you the pressure of ensuring that you can maintain a good cash flow to meet your loan repayment term to avoid losing your assets.
Weighing your options – Is debt financing right for you?
Debt financing is not for everyone. That is why it is important to consider other options for your financing needs other than debt financing. You can consider getting a no collateral loan which is called as unsecured debt but the tradeoff will be paying for a higher interest rate. On the other hand this option remains to be appealing to entrepreneurs owing to its liquidity. If you have shares of stocks in a company, you might consider equity financing which can be a good source to finance the growth of your business.
Types of Debt Financing
Generally speaking, debt financing is the borrowing of money and paying the principal amount with an interest rate. It takes various forms by which one can obtain cash in exchange of contracting out a loan.
Some businessmen opt for trade credit where they can negotiate with their suppliers to pay for their orders later which take the form of a loan or debt. A trade credit is usually a loan window that gives the buyer at least 90 days as a payment term in exchange of the seller’s goods.
This takes the form of a bank or credit union loans which is a financing scheme that is best for small businesses. The borrower gets to pay a monthly amortization for the principal amount with the interest. However, taking out a term loan from banking institutions will usually require a good credit rating from the borrower or collateral for their debt.
This is a type of debt financing arrangement that a business can engage with a bank. Under an overdraft line of credit agreement you get to withdraw a certain amount from your overdraft credit with the bank even when you have insufficient fund. You will be charged with an interest rate that is payable within a certain payment term.