Debt financing is one option for raising money
for your business. Debt financing is when you borrow money from
an outside source and promise to repay the original amount together with an agreed level
of interest. Although the term sounds negative, the majority
of businesses have some level of debt finance. It’s also one of the most frequently used
sources of finance for start-up and new businesses. The most popular sources of debt financing
are banks and other lenders, family and friends, Government loans, and leasing or asset-based
financing. Each of these is covered in some detail in this module. Have a look at the
options and consider which best meets your needs. Remember, the funder wants to know that they
will get their money back and that you have security to cover the loan. This form of financing is attractive to small
businesses because you maintain complete control and ownership of your business. Interest on the loan is tax deductible, and
the financing cost is a relatively fixed expense, making it easier to plan and manage repayments. There are, however, some disadvantages to
consider too. First, you have an obligation to make the
repayments and reimburse the loan (up to the value of your investment in the company),
even if the business fails or does not meet its forecast targets. Also interest rates vary considerably and
the cost of borrowing can be high. Finally, you are likely to have to provide
collateral against the loan, and each loan is also noted on your credit rating. Think carefully before you rush into any sort
of financing and get professional advice. Debt financing may be an appropriate solution
for you. Download the template in this section to make a note of what you need in your business.
It’s a good starting point for starting your search for the best alternative for your circumstances.