Thinking about taking your business to the next level of growth or expansion? Debt financing can be a powerful tool to help your achieve your goals.
Debt financing serves as an access to capital for business ventures, allowing you to achieve business goals with smart financing. You can also use debt financing to expand your business without dilution of control, unlike with equity financing.
Is Debt Financing Right For You?
To navigate this financial landscape effectively, it is crucial to gain a comprehensive understanding of debt financing, assessing its potential benefits and risks to make informed decisions for your business.
While there are many other online resources for understanding debt financing, this article aims to provide an overview of the concept of debt financing. We will also explore the pros and cons of debt financing for businesses to facilitate easier decision-making.
Before considering debt financing, some factors business owners should consider:
- Assess how much capital your business requires and how much debt your business is willing to bear.
- Clearly define the purpose for which the loans are used for.
- Establish a realistic instalment timeline for repaying the borrowed funds.
- Determine if you have any assets that can be offered as collateral unless it is a unsecured business loan.
- Decide on the acceptable interest rate for your monthly instalment repayment and overall financial situation.
- Explore alternative sources of financing for SMEs such as private business lenders, instead of only bank business loans such as the DBS venture debt, to ensure a diversified approach.
What Is Debt Financing?
Debt financing mirrors the concept of taking out specialised loans to pour additional funds into a business. These funds can be sourced from various avenues including revolving loans such as revolving credit facilities or revolving lines of credit, traditional bank loans, or private financing companies.
When a business opts for debt financing, it essentially borrows a fixed sum of money, with the commitment to repay it along with interest.
Collateral, often in the form of company assets, may be required to secure the loan, except in the case of unsecured loans provided by private lenders like Poss Capital. The distinctive advantage of debt financing vs equity financing lies in the fact that business owners retain complete control and ownership of their companies.
Debt Financing vs Equity Financing
Equity financing might be more suitable for early-stage businesses lacking credit or collateral in exchange for obtaining the debt. Business owners will also have to consider the trade-off of relinquishing control.
Debt financing allows businesses to secure funds from creditors while retaining complete ownership and control. One downside to debt financing is that it tends to only be awarded to more established businesses with good credit scores. For more information on how credit scores affect business loan applications, check out our previous article here.
Nevertheless, small businesses can tap into debt financing through private lenders. With simple borrowing requirements, transparent fees, and no early repayment penalties, Poss Capital provides an alternative source of business financing for SMEs in Singapore.
What Are The Types Of Debt Financing?
1. Instalment Loans
These loans involve repaying a fixed principal amount along with interest through a series of scheduled instalments. The interest rate may vary according to a variety of factors including the number of instalments.
2. Revolving Credit Facility
Also known as revolving lines of credit or revolving loans, this credit facility enables borrowers to access capital, repay it, and borrow again without reapplying. With a predefined credit limit and a set repayment period, businesses can manage their working capital efficiently.
What Are The Advantages And Disadvantages Of Taking On Debt?
Benefits of Debt Financing
- Get the money your business need now: Debt financing can give you the working capital you need to seize opportunities quickly.
- Cost-effective and customisable to business needs: Interest rates on business loans in Singapore can be competitive, especially when compared to equity financing.
- Retention of control and ownership: Unlike other funding options, debt financing lets you stay in charge.
Things to Keep in Mind
- Interest adds up: The cost of borrowing can increase over time.
- Debts adds risk: You’re responsible for repaying the loan regardless of revenue generated.
- Not for everyone: Debt financing is unsuitable for businesses with unstable cash flow.
Access To Funds When You Need Them The Most
Running a business is never easy and growing it certainly isn’t either, thus it is important to seize business growth opportunities quickly once you spot them. Apply for a business loan with Poss Capital in minutes and let us help you grow your business without you needing to sacrifice any control over your business. Reach out to us today.
