Debt Financing – The Good and Bad

What is debt financing? Debt financing is when you borrow money from your lender at a fixed rate. It is accompanied by an agreement that you will be able to pay it back at an interest and at a certain date. Although most entrepreneurs are scared of being in debt, most companies or individuals have to turn to debts for financial uplift.

The banks are responsible for most debt financing services. There are some private companies, however, who are starting to reap from debt financing. Believe it or not, friends or family members can also finance your project. Nonetheless, the terms and return principals don’t change. Like they say, ‘a debt is a debt’ and you have to pay eventually regardless of whether it’s from the bank or from a close relative.

Therefore, if you are planning on starting a business (or an investment) and you do not have the money, you can simply turn to debt financing. To avoid frustrations and money problems, however, you must be disciplined enough to handle debt financing and the pressure that comes with it.

To make your business prosper and know exactly what you are up for by undertaking a debt review process. Read on. Listed below are the advantages and disadvantages of debt financing.

Why Debt Financing – Advantages

Ownership is maintained – when you borrow money from the bank or another source, you are obligated to pay. There are no negotiations in debt financing as long as you agree to the terms and conditions. The good news is no one is interested in how you will use the money to run your business. That call is for you to make.

Money is available – with debt financing, you are sure that the full amount will be available. All you have to do is quote your amount and the money is all yours until the date of payment.

Deduction of taxes – deductions can be made from your business income taxes. With tax deduction, you can actually pay your debt at a substantially lower interest rate.

Time to repay – with debt financing, you are aware of the time span you have before repayment deadline.

Disadvantages

Payment– As mentioned above, you are obligated to pay back with interest. Your lender is not interested in whether your business failed or succeeded. In failure or success, you still have to pay.

You may be accustomed–Debt financing might seem an easy way for you to get money, but no matter how attractive this is for business, it’s not okay for you to get used to it. Remember the more you borrow, the more you pay. Each loan comes with an interest rate and at the end of the day, you will pay more.

Guarantee to pay – debt financing is a loan that you are expected to pay at a certain date. So whether you are using the money to invest or promote your business, you have to find a way for income generation. If you have no money flowing in, then paying the debt will be taxing.

High rates – even with tax deductions, you cannot run away from interest rates. The rates, however, vary according to credit history with the bank.