Things to consider about debt financing
When business owners need working capital most of them consider debt financing first. However, there are many different factors that you should consider before you simply take on debt financing. Carefully looking at all of your options before you apply for a business loan will help you to get the right kind of debt financing for your business. Business experts also advise that if you are in a crisis mode with your business you should not make an emotional decision about debt financing. It is important to take the time to look around, have a plan, and learn all you can about all financing options. Here are some things to consider about debt financing-
- Consider the age of your business-One of the first things that you should consider is the age of your business. If you are a new business taking on a large amount of debt financing can be highly detrimental to your business. Most new businesses have very low cash flow and if you are taking on to much debt financing this can burden your business to the point it can't survive. Even though there are tax advantages to having debt financing keep in mind that these are usually very minimal for new businesses. As your business ages it can afford to take on more debt financing due to increased cash flow and lower risk of bankruptcy. In addition, the tax advantages will be far greater, as well.
- Know the status of both your personal and business credit-Long before you apply for a business loan you should pull both your personal and business credit. The reason for this is that any potential lender will be going over both credit reports. You want to make sure that any information that is reported on your credit reports is accurate and up to date. It is also important to understand that if there are mistakes on your credit reports it can take considerable time to fix them. Because this is a time consuming process and you want all information to be accurate do this well in advance of seeking debt financing. Finally, do not make the mistake of not checking your personal credit. Your lender will be interested in how you manage your personal money as well as the finances of your business.
- Know what you will use the debt financing for-It is crucial to have a clear idea of exactly how you will use the money. Not only should you know this but any potential lender will want to know, as well. You will need to determine if the money will be used in a fixed or variable cost. This will in turn determine if a return on the investment will be realized right away or down the road. Your business plan should be detailed as to exactly how you will use the money, as well as how you are going to generate high enough returns to repay the loan in full and on time.
- Know how much accounts receivable that your business has and what state they are in-Knowing the amount of accounts receivable and how current they are will let you know how much cash inflow you can expect. This will be a key figure in how you will repay the debt financing. You want to make sure that you are well informed about how timely your customers are paying. If you want to bring your accounts receivables into a more current state you may want to consider offering an incentive for early payment. You should also consider how your payment terms match up with your competitors.