Is it Reliable to Consider Debt Financing For Your Business?

To reach a determined business goal one needs to acquire capital through financing unless they have enough savings to enhance the business. There are plenty of financing options available which makes it even arduous to choose a reliable alternative.

Both small and large scale enterprises have different terms and requirements. Therefore, debt financing includes various choices to satisfy their transforming funding needs.

Here, we are going to discuss debt financing, a lucrative funding option, its benefits and shortcomings, and different options pertaining debt financing. We will incorporate every detail of debt financing to ensure you get an ideal financing resource for your next business deal.

Meaning of Debt Financing

In simple terminology, debt financing is all about accumulating money through a private lender or a bank with a guarantee of repayment including the interest amount. It is a kind of a loan a business raises according to its financial requirements.

Debt financing comprises business selling bills, notes, or selling bonds to the individual or institution in return of capital. Here, the investors are the creditors to the business and expect the repayment as per the terms and conditions of the agreement.

This method of debt financing is often employed by giant companies who have a strong financial record. That does not mean this method is not applied for small business funding. A small business owner can also procure a commercial business loan by this method from an alternative business lender. However, the repayment and the terms vary depending on the type of loan.

Functions of Debt Financing

Debt financing is a straightforward method to satisfy the needs of the business. When a company needs working capital, funds for acquiring equipment or reserves for new offices, considering debt fundraising is an advantageous option.

Every business owner has to determine their needs before deciding on a suitable debt financing option. Maybe, what works for others may not work for you.

One can consider the following forms of debt financing for their monetary needs.

Instalment Loans

This type of small business loan has a definite repayment and monthly payment considerations. A business here receives a lump-sum payment from the lender and they have to pay the debt in regular monthly intervals until the complete payment. Eg; terms loan, SBA loans, and equipment funding.

Cash Flow Loans

In cash flow lending, once the business is approved for a loan, they are entitled to get the payment from the lender. Here, the payments are done over a set period, whereas the repayment has to be made when the purpose of the loan is served.

This type of lending is exercised by small businesses for satisfying the temporary needs of the business. Invoice financing and merchant cash advances are two most peculiar forms of cash flow loans.

Revolving Loans

Rather than giving the number of smaller payments, this financing option gives an opportunity to the business for a rotational line of credit which one can use, refund, and repeat every now and then. Credit cards and business lines of credit are the best examples of revolving loans.

It is crucial to compare all the different lenders and choose the one which satisfies the business necessities. Research gives a new dimension in making a decision choosing a lending option with best terms, and the loan which is less taxing.

The small business lenders have comparatively broader eligibility criteria that constitute business revenue, credibility, age of business, and many more. In many instances, personal credit history has more importance than the credit history of the prospect enterprise.

Traditional loans, especially bank loans necessitate effective personal credit history, massive annual revenues, and the tenure of the business. Online business loans and other such forms are more flexible as per the terms and conditions of the loan.

Debt financing: Benefits and Drawbacks

Not a single funding resource is completely flawless. If the funding option is comparatively flexible for your business needs, you can definitely go for it. We have given various benefits as well as drawbacks of debt funding. Consider them!

Benefits
Easy Qualification of Loan

Acquiring a loan is not an easy nut to crack and sometimes it also becomes difficult to get eligible for the loan. Unless if you have a popular product or service and years of experience in the trade, investors won’t be considering your application.

Also, small business lending will be difficult in various forms of debt financing. Although there are some options which one can consider as they are not very stringent.

Business Don't Lose the Control

The other principal form of financing is equity financing where investors provide funds to the company and in return ask for the ownership. Thankfully, with debt financing, the businessmen have to pay the interest along with the principal amount. No worries about sharing the equity shares or business decision.

Loan Opportunities are Flexible

Between numerous business loans, it is always a tough decision to choose one out of all. One can pick the loan type that suits their needs and also where the repayment terms are comparatively smooth. Ensure to specify all the things before performing the final statement.

Drawbacks

Not a Budget-friendly Option

The interest rate is nearly 30%,  depending upon the credit situation of the individual, type of loan, and time in business. Some loans also have a triple interest rate, including the merchant cash advances. Therefore, this type of funding is not appropriate for every business type.

Personal Responsibility is Higher

Small businesses would also require to give a personal guarantee. In this clause, it is mentioned that if the business is unable to pay the debt, then the entrepreneur has to repay the loan with their personal assets. If there is no emergency, one must not keep personal finances at risk.

Forms of Debt Financing

We have included all the main areas of debt financing which can compliance the monetary requirements of the business.

Traditional Bank Loans

The traditional bank loans are both long term and short term that can help in uplifting the growth of the company. These loans are presented by various institutions such as banks, credit unions, and other commercial lenders. The only loophole here is that the eligibility criteria are too strict.

Business Credit Cards

Majority of the people these days have credit cards. Business credit cards are not completely different from personal credit cards. They do not get approved only based on business credit history, annual revenue or the age of business. Here, the approval is totally dependent on personal credit history.

The interest rate in business credit cards is more than 30%. A businessman can manage the operating expenses between the grace period of statement and the due dates. Rest amount can be paid as per the convenience of the business owner.

By using business credit cards, one also has the chance to win rewards on everyday expenses. Other benefits include 0% APR promotion, travel coupons, and expense management tools.

Business Line of Credit

A business line of credit is a rotational loan where a business person can obtain the capital whenever he/she needs them, up to a specified credit limit. Another advantage is that, there is a draw period where one can pay the interest amount. One can use, repay, and reuse the available credit as per the business obligations.

Small business lines of credit are one of the most reliable funding options. If the business is new, the interest rates are higher with a limited term. If one wishes to have better term opportunity, they must have a powerful business track record.

Equipment Financing

The small businesses are comparatively more benefited with these loan options as their needs are predetermined.  Also, the equipment or the vehicle that one is buying would be used as security. If the business does not have the position of repayment, the lender has the right to take the collateral.

The above-given secured financing options are not for every individual. Lenders have various criteria which need to be fulfilled. The approval process is not limited to basic characteristics like age of business or the turnover. Ensure you read all the terms and condition before applying for any loan.

Summing-up

Debt financing is not appropriate in the early stages of the business. As in start-up business, the income is low, the tax advantages of the debt will be minimum. When the business is thriving, only then the debt becomes a convenient option. Therefore, a large-scale business can consider debt financing for the growth of the business. In current time, financing lender like Marketlend provides a certified platform through which you can borrow funds for business expansion and even invest your money to get great returns.