Debt financing is a big part of the economic market today. The right funding can help you get your ideas off the ground, buy equipment, and grow your business in a relatively short period of time. But like with any financial product, there are negatives and positives involved. Understanding the basics should help you make the best out of your plan.
Debt financing is a loan or credit that you can use to finance your capital investments. The most common type is a bank loan, which is offered by financial institutions such as banks and credit unions. The financing can also be provided in the form of a line of credit, convertible debt, commercial mortgage-backed securities (CMBS), and other debt instruments.
Taking on debt is appropriate when you need help in growing your company and want a healthy return on investment. The funds often count as business expenses, so you can deduct them from your taxable income at the end of the year. You will also be able to take advantage of your liquidity needs without having to sell any stocks or bonds for cash. You can maintain complete control of your company while getting the help you need, and if your business makes bigger profits down the line, you won’t have to share with investors like you would with equity financing. On top of this, it’s relatively easy to apply for loans and approval tends to be fast.
Debt financing may be a tempting way for you to jumpstart your business, but it’s important to recognize the risks. First, you could be left with a debt that becomes unmanageable. This can happen in two ways: if you don’t repay your loans and interest when they’re due, or if your business doesn’t generate enough revenue to cover other expenses. Second, you may default on an installment loan. Failing to meet your obligations could lead to devastating problems such as foreclosure. You can mitigate these risks by assessing your projected cash flow before making a decision. Once you’re borrowing, you should stick to a steady budget and inventory plan. Fixed monthly installments make this easier.
Running a business can be daunting for anyone, but the right transactions may get you through some of the hurdles. As long as you know what you need, selling debt instruments is a great way to manage your capital and take on new opportunities.