How Debt Financing Can Help Your Business Grow Faster this Year

Introduction. 

If you’re like most small business owners, you’re always looking for ways to keep your company moving forward. One option that may be worth considering is debt financing. This type of financing can help your business secure the money it needs to grow, while also keeping your personal finances healthy. So, how does debt financing work? And, more importantly, is it right for your business? Keep reading to learn more.

I’m not going to lie – debt financing can be a scary prospect for small business owners. But if used correctly, it can be an incredibly powerful tool to help your business grow. Here’s what you need to know about debt financing and how it can benefit your business. First things first; What is debt financing and how can it help your business? Also known as financial leverage, debt financing occurs when a company/firm generates money by selling debt instruments to expand business assets or capital expenditures, usually through bank loans, credit cards, business loans among others.

The lenders become creditors and are in return assured of the refund of the principal and the interest agreed upon. Having known the meaning of debt financing, are you wondering how it can help your business? This article explains that and more, keep reading.

Debt financing can help your business by providing funds to help you scale your business, acquire working capital, and allow business owners to retain control over the finances of their business. So yes, debt financing can help your business in so many ways. it helps you save your business from the financial crisis and provides funds for investing in other sectors. Debt financing is the opposite of equity financing.

Examples of debt financing? Debt financing does not only entails bank loans. It also includes peer-to-peer loans, credit cards, Sba banks, equipment loans among others. Below are things to consider before taking a loan.

Taking a loan can be overwhelming, hence, before taking a loan you should consider some factors. Which includes; loan requirements, the time duration, Interest rate, reliability of the financial institute, among others.

However, before proceeding with your loan application. Here is what you need to know before getting a loan.

1. Understand your credit history.

To get a bank loan, you’ll need a comprehensive credit history. That determines mostly, the loan type you’d be granted. So, when applying for a loan you’ll have to present your debt history, hence analyzing your credit history before proceeding.

With a comprehensive report of your credit history, lenders have an idea of the loan type you are fit for. It helps them in the decision-making process and determines if your loan application would be granted or not.

2. Decide the amount you need.

Consider the right amount you need, and the duration to pay back. Every loan you take, you shall eventually pay back, hence ensuring you take a loan amount you’d be capable of paying back including the agreed interest.

What exactly do you need debt financing for? Is it for real estate, equipment, capital expanding, or to invest in another booming sector? Whatever it is, ensure the loan amount you are applying for is the right amount needed.

3. Where to borrow the loan.

There are several options you could choose from when applying for a loan. It does not necessarily have to be a bank loan you could select from Sba loans, credit unions, and others. The type of loan you want majorly depends on the lender you’ll decide to borrow from.

You as a business owner has varieties of options to choose from, either a bank or credit union? Choose a lender whom you are comfortable with the terms and conditions. Plus, the interest rate is cool with you.

4. Understand the loan terms.

After selecting where you’ll get a loan from, understand the terms and conditions of the loan you are applying for. The interest rate and duration time vary from lender to lender.

Read carefully the terms and conditions for the loan type you are applying for, check the interest rate, the due duration and possible give them to your lawyer. Understanding the loan terms is very important as you’ll be aware of what you are getting into.

Having known this, you are now ready to apply for a loan, however, when should you use debt financing? Don’t worry, this article covers explains that below.

• When should you use debt financing for your business.

Now that you have known what debt financing is, and how it could help your business. You’ll probably be considering implementing debt financing for your business, however before proceeding you should know the right circumstance to use debt financing.

Debt financing can be used by businesses having solid collateral, steady profit returns, and regular sales. Debt financing is not suitable for businesses with low credit earnings. So, there are several circumstances when you should consider debt financing which includes;

1. Short-term loan need.

Business owners usually prefer to use debt financing compared to equity financing when they need a short-term loan. The Short-term loan gets due usually within a year, and it’s mostly used in financing companies’ capital expansion.

2. Management control.

Debt financing doesn’t have any rigid rules such as taking over a firm’s control. Business owners have complete rights over their firm’s management control.

Compared to other forms of financing, debt financing gives the business owners complete right over their business, their ownership right is intact as well.

3. Profitable business.

Another circumstance when you could consider debt financing is when your firm is having high-profit returns. You’ll need to increase capital into your business if you are already experiencing high growth. If your business is profitable enough, you might consider debt financing to invest in your capital expansion.

• Pros of using debt financing.

1. With debt financing, as a business owner, you are given access to full management and ownership control.
2. You could leverage the funds into a higher return, which could otherwise not be possible.
3. Compared to equity financing, debt financing costs lesser.
4. Tax-deductible is possible on debt financing.
5. Different types of options are accessible on debt financing.

• Cons of using debt financing.

1. It might be difficult to get qualified.
2. Debt financing can influence your business growth When you have to keep making a monthly payment for your loan.
3. Another disadvantage of debt financing is that If you fail to pay back the loan, you put your business at risk.
4. Regardless of the business revenue, the loan must be repaid.

• Conclusion.

After reviewing debt financing, the advantages and disadvantages you’ll probably have realized that at some point your business might need debt financing one way or the other.

Most firms require additional funding to invest, expand their capital by purchasing new equipment, supplies, real estate, and vehicles. I am sure you want to try debt financing, right? However, before proceeding we’d advise that your business have constant cash flow so you can be able to pay back the loan.