Debt financing allows you to find funding for your business while maintaining complete control and ownership of your business.
Debt financing refers to what we normally think of as a loan. It boils down to a couple simple components:
- A creditor agrees to lend money to you in exchange for repayment, with accumulated interest, at some future date
- The creditor does not obtain any ownership claim in the debtor's business.
Debt financing is attractive to many small business owners for good reason:
- You do not have to sacrifice any ownership interests in your business
- Interest on the loan is deductible
- The financing cost is a relatively fixed expense
Understanding debt financing options
Throughout this article, we're going to examine the most important aspects of debt financing that you, as a small business owner, need to know, including:
- Common types of bank loans: What types of loans are available? What are the practical considerations you'll encounter?
- What banks look for: Learn about credit history, collateral, cash flow and character as they relate to different kinds of small business loans, and the documents you'll need to secure a conventional loan.
- Asset-based financing: Discover how accounts receivable and inventory can be used as collateral.
- Leasing: Consider renting as an alternative way to finance equipment purchases.
- Trade credit: Take advantage of suppliers that provide an easily available way to supplement conventional borrowing.
- Life insurance companies: Use your existing policy can be a source for low-interest policy loans.
Selecting a bank or other lender
You can investigate a number of institutions that offer small business loans, although each type of lender may be better suited to different lending situations.
- Banks include traditional savings banks, savings and loans, and commercial banks, and are generally the first place small business owners think of when looking for institutional financing.
- Credit unions can offer generous terms to their members, but make mostly consumer loans.
- Consumer finance companies may be willing to make higher-interest loans to higher-risk small business borrowers.
- Commercial finance companies may be worth considering if you need a loan for inventory or equipment purchases.