Most business owners require debt financing at some point, especially start-ups and small companies. From business equipment to inventory to payroll, it seems there is never a shortage of expenses. The term debt financing refers to borrowing money from an organization outside the company such as a bank, credit union, or finance company. You probably also know it as a business loan. Once approved, you agree to make monthly payments plus interest to the lender every month until you have paid the debt in full.
How Debt Financing Differs from Equity Financing
With equity financing, you sell a share of your company or its future profits to investors in exchange for immediate working capital. It is important to consider this option carefully as anyone with a significant share in your business also has a say in how you operate it. If you want to continue to call the shots, consider taking out a business loan instead. This allows you to retain your original ownership percentage in your company. Other benefits of debt financing include:
• You don’t need to plan an exit strategy to pay investors if you decide to close or sell the company.
• Debt financing allows for simplified budgeting because the amount due remains consistent each month unless you have opted for a revolving business credit account.
• Debt financing typically qualifies as a tax deduction under the category of business expenses. Any tax deduction can come in handy when you are a small business owner watching every penny.
Keep in mind that your lender may require you to put up some form of collateral to secure the loan.
What Type of Debt Financing is Right for You?
Although bank loans are the most common form of business financing, you have several other options as well. You can consider a business line of credit, invoice factoring, a merchant cash advance, and other non-traditional options to get the money you need to keep your small business operating smoothly. Please contact POM Capital & Funding Services today to learn more about our alternative financing opportunities.