The pros and cons of debt financing
When a business needs money the business owner typically turns to debt financing. However, debt financing is only one of the ways that you can finance your business. Every business owner should take the time to educate themselves about all business financing options. There are many different benefits and downsides to using debt financing so before you make a choice to use debt financing a business owner should learn all they can about it. When you completely understand the ups and downs of using debt financing you will be able to make the right decision for your business and its needs. Here are the pros and cons of debt financing.
The pros of debt financing include but are not limited to-
- Debt financing allows the business owner to retain control of the business. When you take on investors you are giving up some control of your business. Your investors will own a portion and some will want an active say in how you run your business. For those business owners who want to retain complete control debt financing makes this possible.
- Debt financing comes in many different forms. There are many different ways that you can obtain debt financing. You can approach family and friends, take out personal loans, use home equity loans, credit cards, or go thorough the traditional route and obtain business financing. The many options for debt financing allow business owners to explore the choices that would work best for them and the needs of their business.
- Debt financing means that you can keep all of the profits. If you choose to take on investors rather then use debt financing they will be looking for a significant return on their investment. That means that some of your profits will have to be paid to your investors. When you use debt financing for your business your lender will only require that you make your loan payment on time.
The cons of debt financing include but are not limited to-
- Debt financing may require a large loan payment just when you don't have the needed cash flow. You will need to take into account that your loan payment will be required regardless of how your business is doing. Whether you are in the startup phase or more established you will have to make your loan payments on time in order to keep and maintain a healthy credit score.
- Debt financing usually means that you assume some risk-Few lenders will be willing to give you money without some collateral or at least seeing that you have invested, as well. They will take your degree of investment as an indication of your confidence into the success of your business. This means that you will either need to pledge some sort of collateral or be willing to put up some of your money and show your lender that you are willing to risk your own personal finances. However, it should be stressed that you should never put money into your business or sign over an asset to the bank that you cannot afford to lose.
- Debt financing increase the risk ofbusiness failure. The bottom line is that the more debt financing that you take on the more risk you are subjecting your business to. This is especially true for new businesses. Studies show that the number one reason for business bankruptcy is the overuse of debt financing. This means that business owners should be very careful about how much debt they take on for their business. While debt financing can be the right choice for a business, the business owner should carefully consider their options before borrowing money.