Business owners need to understand that leveraging on debt financing can make or break any business. The risk that it poses is great, but the success it brings could be even greater. It can offer you proper support, helping you achieve your business goals. Debt financing aids your business financially, enabling business growth. Consequently, you need to understand not only your own business, but also debt financing. This way, you can determine the potential benefits and risks of taking up debt financing, in order to make the right decision for your business.
Some questions you should ask yourself are:
- How much capital do I need?
- What do I need it for?
- When will I be able to pay back the money?
- Do I have any available collateral?
- How high of an interest rate am I willing to pay?
- Do I have other sources of funds?
What Is Debt Financing?
Debt financing is often a port of call for businesses seeking extra funds. Think of it as taking out a specialised loan. This can come from various sources, like banks, credit unions, or private lenders like us. When a business opts for this, they’re borrowing a set amount of money, which they’ll need to pay back. On top of the borrowed amount, there’s an interest, which is like a fee for using the lender’s money. Sometimes, loans might require collateral, a security-like company assets. If the loan isn’t paid back, the lender can claim these assets. But the real beauty of debt financing? Even with the loan, a business owner retains complete control and ownership of their company. It’s a way to get funds without giving away any part of your business.
Contrarily, there’s equity financing. Here, instead of borrowing, companies sell parts or shares of their business to raise the necessary funds. But, there’s a trade-off: by selling shares, you often share some control with the new shareholders.
Now, businesses face a pivotal decision: Borrow using debt financing or sell shares through equity financing? Both paths have their unique advantages and challenges. Let’s dive in further to understand which one aligns with your business vision.
Debt Financing vs Equity Financing
Ownership & Control
As equity financing works by selling shares to investors or other shareholders, it means that a certain degree of control over the company is given up to others. This method of funding is suitable for businesses at early stages, with no verifiable credit or collateral. However, you risk losing control and ownership of your own business.
In comparison, debt financing allows you to retain ownership and control of your business while still receiving funds from creditors. A downside is that it is often only available to well-established businesses, since financial institutions look at credit scores. However, small businesses can benefit from debt financing too, with private lenders. With fewer borrowing requirements and transparent fees, Poss Capital is here to bridge your financing gap, by providing an alternative source of capital. Grow your business without losing control of your company, focusing on what is important.
What Are The Types Of Debt Financing?
Plan to take up debt financing? Then you need to know its different forms.
Instalment Loans
Loans repaid over time with interest through a series of scheduled payments, known as instalments. The loan principal is fixed, as well as the payment schedule, while the interest rate is variable.
Revolving Credit Facility
This is also known as revolving lines of credit or revolving loans. It is a credit line issued to borrowers that lets them borrow capital, repay, and borrow again, without having to reapply. There is a set total credit limit, and borrowers can only borrow within the specified time period. Each repayment includes interest charged on the principal amount, and the set credit limit replenishes with each repayment.
What Are The Advantages And Disadvantages Of Debt Financing?
Pros
- Provides businesses immediate access to capital
- Less costly, customisable to the needs of the business
- Retain control and ownership of the business
Cons
- Interest payments need to be paid to lenders, increasing the cost of borrowing
- Financial risk increases, as debts need to be repaid regardless of the business’s revenue
- Unsuitable for businesses with unstable cash flow
Access to Funds When You Need Them The Most
It is important to understand your business and seize growth opportunities when you spot them. In order to effectively scale your business without worries, you can acquire business financing with Poss. Contact us today to achieve your business goals.
