Author: Sharita M. Humphrey
Debt has a bad reputation. If you’re thinking of high-interest credit cards and financing that exceeds your ability to pay, that kind of debt deserves the bad rap. However, as a business owner or entrepreneur, you’ll experience times when debt is necessary to take your business to the next level. We call this debt financing.
Understanding Debt Financing
Simply put, debt financing is borrowing money from an investor, bank, government entity, or another company in order to finance your current business needs. You’ll agree to repay the loan, plus interest, in a given timeframe.
How is debt financing beneficial to your business?
As a business owner, you take risks in order to grow your business. Debt financing is no different. If you evaluate the amount of risk as compared to the level of benefit you expect to see from the investment, you can make a well-informed decision about whether financing is right for you.
Here are a few key ways to improve your business by leveraging debt.
Maintain Business Ownership
The foremost advantage of this is that the ownership and control of your business remains yours (or with the shareholders). Despite the necessary fees and interest, the lender does not gain control over how you run your business. And in a worst-case scenario in which you end up defaulting on the loan, only the collateral is taken and not your entire business.
Reduce Government Taxes
Debt financing is also a practical action to pursue as the government allows you to file for a tax deduction on the fees, interests, and other charges related to this type of financing. This means your business will not have a double tax payment for the same charges.
Provide a More Affordable Financing Option
As opposed to equity financing, wherein a portion of the business is sold off to the investors, debt financing simply focuses on settling the debt and its interests. Debt payment is the only obligation for the business, so you don’t have to fear reducing a portion of your business when the journey gets shaky.
Debt financing is relatively easy to obtain. Unlike taking on an investor, you don’t have to go through rigorous investor evaluation or serious negotiations to determine what percentage of the business will be owned by you and your investor. You simply apply for this kind of debt with its straightforward process and prepare to pay the principal and interest as your agreement dictates.
Build Credit History
As a business owner, acquiring good credit history will allow you to continue to access great credit options in the future. Managing the repayment of your financing loan will demonstrate your responsibility in handling your credit in a consistent and timely manner. Debt financing gives you the chance to strengthen your business credit, making it easier to apply and be granted financial backing as your company continues to grow.
Enable Good Planning
Settling your fees and interest with debt financing can be established through adequate planning. Because the amount you pay is fixed, you can project your expenses specifically month after month. Your business budget will be simpler, leaving you free to plan your other expenses.
Presents Flexible Loan Options
Similar to any other type of loan, debt financing is also good because you have the option to decide whether you’re paying it in the short term or long term. Depending on your current business needs, the timeliness of settling your debt could be flexible. You and your lender can discuss the pros and cons of the different timelines available.
When is the right time to start debt financing?
Gaining adequate knowledge in this topic is a wise action as you nurture your business towards growth. Everybody wants growth and progress, no question on that. As you do your research, you’ll be able to decide if financing is the right decision for your business at this time.
Look for reliable information and trusted advisors. You can navigate your business path wisely when you are confident you have the backup you need.
Where do you go from here?
At the end of the day, exploring the options in debt financing for your business is up to you as a business owner.
Most importantly, do your due diligence to make an informed decision before you jump into any crucial financing decisions. If you want to learn more about business financing and other financial principles, reach out to us. We would be honored to help you on your journey.
And if you also have any insights or experiences to share regarding debt financing, leave a comment below. We look forward to hearing from you.
About the Author: Sharita M. Humphrey is an award-winning finance expert, money mentor and Certified Financial Education Instructor. Once broke and homeless, Sharita completely transformed her life and is now a successful entrepreneur and one of the most in-demand money coaches for individuals and business owners of color. In 2020, Sharita was named National Financial Educator of the Year.