Debt is a bad word. Debt that is high-interest or financing that is beyond your means of payment deserves a bad reputation. As a businessperson or entrepreneur you will encounter times when debt becomes necessary to grow your business. This is called debt financing.
Understanding Debt Financing
debt funding can be defined as borrowing money from a bank, investor, government agency, or other company to fund your current business requirements. You will agree to pay back the loan plus interest within a specified time frame.
What are the benefits of debt financing for your business?
You take risks as a businessman to grow your company. The same is true for debt financing. You can decide if debt financing is for you by comparing the risk to the expected return.
Here are some key ways you can improve your business using debt.
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Keep your business ownership
This has the biggest advantage that you retain ownership and control over your business (or the shareholders). The lender has no control over your business despite the fees and interest. In the worst case scenario, if you default on the loan and your business is taken over by the lender, the collateral will be taken.
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Reduce government taxes
It is also practical to use debt financing, as you can claim a tax deduction for the fees, interest, and other charges associated with this type of financing. It means that your business won’t have to pay double taxes for the same charges.
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Offer a Financing Alternative that is More Affordable
Debt financing is different from equity financing where a part of the company is sold to investors. Instead, the focus on debt repayment and interest payments. The only thing that the business has to do is pay the debt. This means you won’t lose any of your business if the road gets rough.
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Easy Access
It is easy to get debt financing. You don’t need to undergo a rigorous investor evaluation, or negotiate hard to decide what percentage of your business you will own with your investor. This debt is easy to apply for, with a simple process. You will then be required to pay back the principal as well as interest according to your agreement.
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Build Credit History
A good credit rating will help you access credit in the future. Your ability to manage your financing loan in a timely and consistent manner will show your commitment to managing your credit. Debt financing allows you to improve your credit score, which will make it easier for your business to be approved and receive financial support as your company grows.
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Plan well to achieve success
Planning is key to settling your debt and fees. You can plan your monthly expenses precisely because the amount you pay each month is fixed. You can plan other expenses because your business budget is simpler.
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Offers flexible loan options
Debt financing, like any loan is good because it gives you the choice to pay the debt in the long or short term. The timeliness for repaying your debt may be flexible depending on your business’s current needs. Your lender and you can discuss the advantages and disadvantages of different time frames.
When is the best time to begin debt financing?
It is wise to gain adequate knowledge on this topic as you strive to grow your business. Everyone wants to grow and make progress. You’ll know if you are making the right choice for your company based on your research.
Find reliable sources of information and advisors you can trust. When you know you can rely on the support you need, you will be able to make wise business decisions.
What is your next step?
You, as the business owner, are ultimately responsible for exploring your options when it comes to debt financing.
Do your research and make informed decisions before making any important financing decisions. Contact us if you would like to know more about financing for business and other financial concepts. We are honored to assist you in your journey.
If you have any thoughts or experiences about debt financing to share, please leave a comment. We are looking forward to hearing back from you.