How to Make Debt Financing Work for You
Whether you need funds to pay bills or you want to expand your business, you have two options for financing. You can either rely on debt or equity financing for the capital you need. Debt financing is a reliable and common method of obtaining funding, but you need to know how to make it benefit your business.
Debt financing is a simple concept that most business owners are aware of. It is a loan from a bank, a finance company or other financial institution. You can get money from private investors, but it is not the normal method of using debt financing for most companies.
Most businesses will qualify for a loan unless they have poor credit. Even then, alternative lenders usually provide some type of loan for those with less than perfect credit. The lender will check your business credit rating and may even ask about your personal credit history, depending on how long your company has been in business and the structure.
You need to provide information about your business, which may include documentation such as a balance sheet and profit and loss statement. Some lenders request more documents than others, but you should have everything in order.
Advantages of Debt Financing
Debt financing has several advantages, which makes it attractive for many business owners. For one thing, the lender has no control over your company or the decisions you make. It does not own any part of the business. Once the loan has been paid, the relationship with the lender comes to an end.
Another benefit of taking on a loan for your financial needs is that the interest is tax deductible. This can help reduce your overall tax liability and keep more money in your business. It is easy to calculate the monthly payment as part of your expenses, which allows you to create a more accurate budget.
Debt financing has several advantages, which makes it attractive for many business owners. For one thing, the lender has no control over your company or the decisions you make.
Disadvantages of Debt Financing and How to Prepare
The main disadvantage of taking on debt as a business is you must have the funds to pay it back and pay all your other expenses. This can be challenging, especially if you took out the loan because of low revenue. Some businesses have times of slowdown, which can significantly impact their ability to repay the loan.
The second issue with debt financing is the fact that it can be hard to qualify, especially in a slow economic period. Only businesses with excellent qualifications will be approved for a bank loan.
To avoid these disadvantages takes preparation. First, you must make sure your business is solid and all documents are in good order. You should have a plan in place for how to meet your budget if income slows down in the future before the loan is paid off.
One way to deal with either of these issues is to look to alternative lenders. They are often more flexible with their lending requirements and loan terms than banks and other traditional funding options. These lenders may provide options for repayment and even different products based on qualifications and need.
Before You Apply for Debt Financing
Be prepared to take on more debt with a business loan. Follow these tips and you can make debt financing work for your business.
- Know how much money you need. Consider future expenses and other relevant issues so you ask for enough money that will get you through your current situation.
- Know how much you can afford in repayment terms. Be realistic and err on the side of caution, taking into account changes in revenue or increases in costs.
- Shop around for lenders with the terms you need. Don’t be afraid to ask for your terms even if they aren’t standard for the lender. They may be willing to work with you.
Debt financing can be a viable option to help a business survive tough times or expand during thriving times. Just make sure you understand the risks and rewards and your options before you seek out a loan.
Fast Track Lenders provides loans for small businesses that need financial assistance. Even if you do not qualify for a traditional loan, we may be able to help you get the funding you need. Contact one of our funding specialists or apply online and get fast approval.
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