Business owners need to understand that leveraging on debt financing can make or break any business’s potential success. That is why you need to be aware of your strengths in the industry and capitalise on those available assets. Debt financing can offer you the proper support function in achieving the goals that matter for your business.
Debt financing proposes the benefit of empowerment. Not only does it represent financial support, but it also serves as an enabler of business growth and sustainability. Consequently, you need to understand the upside potential and downside risk to navigate your business plan effectively.
Questions to ponder on
- How much capital do you need?
- What is the end use?
- When can you pay back the money?
- Do you have available collateral?
- What is the interest paying capacity?
- Will you consider other sources of funds?
- Will other shareholders agree to lose some authority over the business?
What Is Debt Financing?
Debt financing is monetary support to fund the working capital or the business’s operating expenses. Likewise, the financial institutions or private lenders who finance the means become the creditors. Both the creditor and the debtor will have to agree on a repayment mode on a future date, along with the amount of loan principal and interest breakdown. This debt structure kicks in when the company takes on the liability.
The other form of raising capital in the debt market is equity financing which is an altogether different form in terms of leverage structure and operational implication. Equity financing occurs when the business sells a minority stake.
Debt Financing VS. Equity Financing
Debt Financing and Equity Financing vary in several aspects, particularly in the business’s financial obligations and, to some degree, the redesigned control structure. However, the feature that distinguishes these options is that debt financing requires the business to pay the principal with its interest while exercising complete ownership of the business.
A certain degree of control over the company is given up to the creditor when a minority stake is sold for equity financing. It is most suitable for businesses at an early stage with no verifiable track record or collateral. Business owners can obtain additional financing and focus on effectively growing the business without worrying about debt repayment. However, it comes with the risk of losing control and ownership of your business.
Comparatively, debt financing is better for working capital and long-term investments. However, it is often available only to well-established businesses as the borrower’s credit scores and financial performance matters. Poss Capital is here to bridge the financing gap by providing an alternative source of capital. Accessing these funds is quick and is subject to fewer requirements.
What Are The Types Of Debt Financing?
If you plan to redesign the trajectory of your business by leveraging it, you need to understand its forms.
- Instalment Loans are loans extended to borrowers and repaid in a regularly scheduled payment. Each instalment must cover the principal amount and interest payment.
- Revolving Credit Facility is a credit line issued to borrowers that allows them to draw down or withdraw, repay, and withdraw again. Each repayment includes interest charged on the principal amount utilised and is accommodates borrowing and repayment simultaneously.
Advantages And Disadvantages
Pros
- Debt financing enables businesses to leverage and convert it into potential profits.
- It is less costly and can be customised according to the necessity of the business.
- There is no risk of losing control and ownership of the business.
Cons
- Need to pay interest to lenders.
- Debts need to be paid regardless of revenues.
- Not suitable 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. Leverage on the possibility of debt financing to effectively scale your business without worries. Acquire business financing from Poss with simple borrowing requirements and transparent fees. Contact us today if you require additional business financing to achieve your business goals.