Not many companies can survive without having funds. So, if you want to start or run a business, having funds is necessary. Even the best business leaders sometimes rely on additional short-term funding to keep their company going. But the important question is what to choose from a wide variety of different debt financing options available out there.
In the financing field, there are many kinds of financing available to businesses and one of them is debt financing. It’s a similar concept to a loan. You borrow funds from a bank or a funding group and promise to repay it with additional interest. The interest is the price you pay for initially borrowed money. To reassure the lender you’ll pay back the money, it’s necessary to put up inventory, real estate, equipment, insurance policies, or such assets as collateral. In case you’re unable to repay the debt, these assets will be used as a repayment. So, if you’re considering getting additional funds, here are some advantages of debt financing that can help your business.
1. Quick money
Debt financing is a much faster method of obtaining money than applying for a loan. The period of approval is also much shorter, which makes the debt financing more convenient if you need urgent cash. The cash arrives to your account as soon as the invoice is issued.
To operate a business, besides the money on your account you need to know the basics of money management. Once you’ve obtained the cash, you can use it for various things like increasing the sales, updating the workspace, investing in capital, hiring a professional, etc.
2. Accessible to companies every size
Hypothetically, if you were to start a business right now, you’d most likely struggle with funds. However, applying for a loan would be almost, if not completely, impossible as you wouldn’t have a good credit score history to submit.
Even if you had a positive cash flow history, you’d be dismissed by venture capitalists as they are searching for firms with over 1 billion profits. So, an ideal solution for you would be debt financing. This way of financing is accessible to companies any and every size. As long as you meet the requirements regarding the repayment, you’re a good candidate for debt financing.
3. Keeping business ownership
Besides debt financing, there is another way of financing your firm in the business field. It’s called capital raising through equity financing. Instead of borrowing money from a funding group, as you’d do with debt financing, equity financing is a method of obtaining cash by selling your firm’s stock to the financer. Which basically means that you’re giving ownership interest to the financer. The share that is under the financer’s control depends on the proportion of sold stock and the amount of money invested in the firm. Inexperienced managers shouldn’t opt for this type of financing especially if they do not know how to properly sell stocks.
On the other hand, if you go for debt financing, you don’t have to give out or sell your company’s share. Only in certain cases when you’re unable to pay off the principal and interest, a piece of equipment or insurance policy will be used as collateral. Giving up on the collateral doesn’t mean you’ll have to give up your company.
4. Retaining the full control
Regarding the last issue, with split ownership, comes split decisions making. Since you’ve sold the part of your company’s shares to the financer, you’ll no longer be able to make the decisions on your own. From that time on, you’ll have to seek approval or reach a mutual agreement on things like who to hire or whether this supplier is reliable or not. In addition to that, many financers like to be almost completely in charge of the decision-making process of the business they invest in.
On the other hand, a group or a person you’re borrowing money from has no right to tell you how to run your own business. However, they may still like to take a peek at your credit scores to perform the analysis. But they don’t have a say in your decisions about purchases or hiring. As long as you stick to your planned repayment schedule, they’ll let you run your business at will.
5. Lower taxes
Paying interest for the borrowed money for your business is tax-deductible. It doesn’t matter if they are charges from a loan or a debt, as long as they are used for business expenses. The only conditions are that you are legally responsible for that loan or debt and that you and your financer have intentions to repay it.
Because of these tax advantages that come from debt financing, comparing it to other financing options, you may need to adjust your interest rate. Taking into consideration the companies, such as Classic Funding Group, that offer the best interest rates, it’s safe to say that taxes may improve your end-of-year bottom line.
6. Improving business credit score
Timely payments to your financer have the purpose of improving your company’s credit score. A good credit score is an amazing parameter of how reliable you are as a business owner. In addition to that, it demonstrates the sufficiency of your company’s cash flow, which can help you obtain further loans or debts.
Conclusion
If you’re unsure whether you should or shouldn’t go for any kind of additional financing, make sure to do your research first. Before signing a contract, read all the advantages and disadvantages of that financing method. Keep in mind that you are doing what’s best for your business.
