Debt Financing
Many entrepreneurs think that the best and common form of raising money for their startup is equity financing. It involves the usual pitching to venture capital firms and investors for raising money in exchange for equity in company. However, Equity is not the only way of raising money for company rather debt financing can help in other cases also. Debt financing is money that has to be pay back and it can take the form of a line of credit, a merchant cash advance, a loan, or a credit card. Using loan for obtaining capital or growth funds for starting a business is referred as Debt financing. Debt financing allows businesses to get the money they require for their business without giving away equity. Provided businesses can continue with the payments of interest and pay off all they owe and will get to maintain all the remaining proceeds in the coming years.
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Sources of
A number of sources are there for obtaining debt financing for your business. Some of the sources are outlined below:
Private Lenders: It can come from lenders such as family members, friends, colleagues, relatives, spouses, and private donors from whom you can connect with for raising funds.
Traditional Lenders: It includes banks that may do advance financing in the various business forms such as lines of credit and secured as well as unsecured loans.
Personal Financing: One can choose this from for obtaining personal loans from traditional lending sources or can use credit cards for financing business using debt.
Modern Lenders: this type includes payday loan lenders and peer-to-peer lenders.
What to Consider Before Deciding on Debt Financiers
Below are some factors that one needs to consider before obtaining debt financing options for their business:
Amount: The more one borrows, the more he has to pay back. And if one borrows money more than what is needed, there is a possibility that you will squander it which might result to a huge debt pushing your startup business into bankruptcy.
Interest Rates: Always bear in mind that depending on the monthly payable amount, interest rates on loans is likely to go higher. This can hinder with cash flow, which in turn might stumble your business. So better try looking for debt financing offers that give favorable interest rates. Always remember that loans obtain without any security might have higher attached interest rates.
Your Options: With plenty of available debt financing sources, it is up to your best interests to choose the financing options carefully.
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Pros of Debt Financing
No Equity Giveaway: One of the best pros of debt financing for startup business is that you don’t have to give away business share equity, which in turn will keep full control over business.
No Claims on Future Proceeds: As long as you owe the debt, debt financing will only permit you to pay the agreed-upon sum. Without allotting further money to your lenders, you have to keep all of the proceeds once debt obligations are completed. The money is all yours when you pay off what you owe, even if startup business is purchased for millions of dollars.
Cons of Debt Financing
Payment obligations: Lenders expect that you pay off your debt like clockwork even in difficult times as they don’t have stake in the business.
Assumption of all losses: You are the sole responsible for the all the risks, when you are the only owner of the business. When you fail then not only you need to assume your losses, but those of lenders too, as they can sue you if you can't complete your agreement.
Moreover, debt financing has its advantages as well as disadvantages; it’s up to you whether you choose this kind of financing for your business startup will work for your requirements.
About ALCOR Mergers and Acquisitions
Alcor M&A is a leading advisory firm providing financial services with an emphasis on customized solutions in the areas of M&A advisory, Joint Venture Advisory, Financial Advisory, Private Equity, Debt Financing and International Business Development. These services leverages insights, relationships and a culture that emphasizes a strong orientation towards excellence.
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