Debt Financing & Equity Financing

Although the term “debt” is often times looked at negatively, this does not always have to be the case. Many companies, especially startup organizations, turn to debt financing as a way of taking their operation to the next level. Although the most common source of debt financing is the bank, this is not the only option. Other sources to consider include private companies, friends, and family members.

Debt Financing Benefits

Before you get involved with debt financing it is important to learn more about the benefits and advantages.

• Tax deductions. As a business owner, this is something you should be thinking about at all times. Many consider this to be the biggest benefit of debt financing. In most cases, principal and interest payments on a business loan are considered an expense. In turn, this it can be deducted from your income taxes.
• The ability to maintain full ownership. When you borrow money from a bank or any other source, you have an obligation to pay it back over a predetermined period of time. This is the only thing that you owe to the lender. You can continue to run your business as you wish, without any outside intervention. This is in contrast to obtaining funding through a venture capital firm or angel investor in which you are giving up a share of your business.
• Lower interest rate. Not only can you receive a low interest rate with debt financing, but you should take into consideration how this impacts your tax situation. In short, you should get involved with loans that you can deduct. This can help offset a higher interest rate, should you be put in this position. In short, the loans at credit.com are even deductible.

Debt Financing Drawbacks

Despite all the benefits of debt financing, just like any source of funds there are going to be drawbacks.

• Repayment terms. No matter if your business succeeds or fails, you are responsible for paying back the money to your lender.
• Credit rating impact. Every loan that you take is added to your credit report. For this reason, as you continue to borrow your risk of missing a payment increases. Along with this, the bank is forced to charge you a higher rate of interest.
• Collateral. You will be asked to put up collateral in the unfortunate case that you are unable to make payments. Does your business have anything of value, such as real estate, that can be used as collateral?

Now that you know the pros and cons of debt financing, you can decide if this is the best way to grow your organization.