You may also be asked to put your personal assets as collateral this can potentially put your own assets at risk. In that case, you are putting your business assets at risk. You may be asked to put up collateral for debt financing.

You need to have the financial discipline to make timely repayments. You need to have a good credit rating to qualify for debt financing. Since you know how much principal and interest you would be paying every month towards your loan, it becomes easier to plan your monthly budget. This means your net obligation is effectively reduced. The interest you pay on a loan is tax-deductible. Once you repay the loan, the business relationship ends. When you take debt financing, the lender has no control over your business decisions. In this type of loan, the business can only use the funds sanctioned to purchase equipment for business activities. Unsecured business loan does not need collateral, but the business must have a good credit score to get the loan approved. A business with a low credit score may get the loan approved because it is backed by collateral/asset. This type of business loan needs collateral. Here are a few most common types of debt financing most small businesses and startups use: When a company chooses debt financing, there is no loss of ownership. This is known as debt financing.ĭebt financing can be secured or unsecured. When a company borrows money either to expand its business or to grow its working capital, it has to be repaid with interest within a stipulated time frame. This post will talk exclusively about debt financing.

While debt financing is provided as a loan and needs to be repaid, equity financing requires the business to part away with a share of the company against the loan they borrow from the investor. There are three ways by which businesses can raise funds: Most businesses at some point need additional funding to either expand their business, boost their revenue or increase their company’s value.

Debt finance definition