Published on May 31, 2022Updated on Sept 6, 2023
"Access to capital" is one of the considerable barriers small businesses face while looking to plan their growth strategies. An unequivocal truth in any business is that it requires money to make money. But the question arises where will that money come from? There are lots of options.
Don't be scared of the word "debt". Debt financing is the deed of raising capital by borrowing money from a bank or a lender. Creditors are then owed interest on the money borrowed.
Debt can be cost-effective, providing small businesses with the funds to stock up on inventory, hire additional employees and purchase real estate or much-needed equipment.
You have various options of debt financing. They include merchant cash advances, small business credit cards, small business loans, and term loans. Although each type has its advantages, before considering applying for any of them, you should be sure of how much you need. Therefore, it is essential to research your options well before choosing the one which is best for you.
There are many advantages of debt financing, from tax benefits to retaining control of your company. Here are the top six:
When you take a loan from a financial institution or alternative lender, you need to pay the principal amount as well as a pre-decided interest. These institutions do not have any say in how you run your business. In contrast, if you give up equity in the form of stock in exchange for funding, you may find yourself unhappy about input from outside parties regarding the future of your business.
Therefore, in debt financing, you retain the ownership of your company and are free to make decisions at your discretion.
Finding investors may take a long time. But if you meet the required business loan eligibility criteria, and need quick funds to manage your working capital or day-to-day expenses, then a business loan would be a good idea. On the other hand, if you are a startup and have less than 3 years of business existence, or have not been profitable for the past 2 years, or are looking for long-term financing options, then finding investors would be a better idea.
Expert advice: Always make a clear business plan and know where you stand to understand the kind of financing you need.
Credit cards, peer-to-peer lending, short-term loans, and other debt financing options aren't helpful if the interest rates are sky-high.
These loans usually have extremely high-interest rates, compared to standard business loans. You need to simply verify the impact of your decisions on your total interest outgo.
When you have an idea of how much principal and interest amount you need to pay every month, it becomes easier to plan out your monthly budget. Use our business loan EMI calculator to get an estimate of your monthly outgo in case of an unsecured business loan.
Alternate fundraising methods may not be accessible to businesses of all sizes. For example, venture capitalists frequently discount several small businesses in their hunt for the next hit 'unicorn', where creating and issuing bonds is a complicated process at its best. Debt finance, however, is an easily accessible option for businesses of all sizes (except for startups with a legacy of less than 3 years).
When you compensate all your EMI payments on time, it helps in adding up to and improving your credit score. This, thereby, enables you to easily access funds in the future when you may require them again.
Moreover, a good credit score displays to lenders and vendors alike that you are a responsible business owner and that the cash flow of your business is enough to meet all its obligations.
Hence, Debt Finance is an excellent option to vouch for when there is a requirement of funds in your business. But be sure that you can easily repay the loan amount you borrow along with interest. Moreover, do go through the required business loan eligibility criteria before applying for a business loan. If you are not eligible for a business loan, consider applying for a personal loan. If you don’t have a steady source of income, you can ask a close family member with a stable income and good credit score to apply on your behalf.
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