Debt financing is when a company borrows money to run a business. Starting a business is not that easy. you have to face a lot of troubles. sometimes you need to borrow money in order to run your business properly. Sometimes you need money to expand your business, or to get supplies to keep running your business smoothly. This is when debt financing gets important.
Usually, businesses need either long-term debt financing or short-term debt financing. Long-term debt financing is associated with real estate or purchasing heavy machinery. However, in short-term debt financing, you borrow money to get supplies or finance payrolls.
Many people made mistakes by using their personal credit cards for financing their ventures. This might sound like a quick and easy option. However, it is not advisable to use your personal credit cards in this matter.
If your venture is going into crisis or you want to expand it, you should always consider debt financing. It is the best option for you. Because it has the capability to save your business from a lot of troubles and it can provide you with such amount of funds that are important for your business.
Sources Of Debt Financing
Here are the main types of debt financing you can consider to run your venture smoothly.
Number One: Bank Loan
A bank loan is the most common type of debt financing. It is the best option for you to use a bank loan to save your business from a crisis.
Bank loans are usually a quick and easy way to get funds for your business, which h you can repay over a fixed period of time. You can either get a loan term or a short-term loan depending upon the size of your business.
Before applying for a bank loan, the borrower needs to know about bank application rules, interest rates, and the repayment period. The interest rates vary from one bank to another.
Number Two: Bonds
Generally, bonds are loans taken out by businesses to get out of the crisis. Borrowers issue bonds to raise money from investors who are willing to lend their money for a certain period of time.
When you buy any bond, actually you are lending money to the issuer of the bond. The lender is supposed to pay you a principal amount with a specific amount of interest over a fixed period of time. Hence, you can consider bonds to finance your business.
Number Three: Business Credit Card
Business owners often have business credit cards to establish their business and run them smoothly. You can use the business credit card for your business expenses like purchasing machinery, getting supplies, or travel.
Having a business credit card is always useful for building and maintaining your business without worrying about cash.
Related: 5 Best Online Business Loans To Grow Your Business
Number Four: Peer to Peer lending (P2P)
Peer-to-peer lending is another source of borrowing money for your business, in which you borrow money from individuals or other businesses to tackle your business problems. You can also borrow money from online lending sites like GoFundMe, Kickstarter, or Prosper. These online lending platforms are the most accessible sources of debt financing.
This source is best for those who want to finance their small startups. Some online peer-to-peer online lending platforms require details about your business before offering you money.
P2P lending can damage your business’s reputation if you don’t pay it back on time.
Number Five: Intra- Family loans
You can also consider lending money from your family members to run your business. Getting loans from friends and family to stable your business is a common source of debt financing. Family loans are less formal than other loans.
Nothing can stop you from borrowing money from your family members if they are willing to lend you. Even if you have bad credit history; you can still get a loan from your family or friends.
What Are The Pros Of Debt Financing?
There are several pros of debt financing. Here are some of the best reasons to consider debt financing for your venture:
- with debt financing, your business ownership stays with you.
- the repayment of a loan is considered as a business expenses, this reduces your tax obligation.
- It is less costly than equity financing.
- With debt financing, you can expand your small business into a large business.
- You have to pay back the loan on monthly payments.
The Take-Away:
Most businesses will need some form of debt financing to maintain and run their business smoothly. With the help of debt financing, you can expand your business in less time.
Also Read: Credit Card Debts: Best Advice From Warren Buffett In 2022
