The Pros And Cons Of Debt Financing

What is Debt Financing?

Debt financing is capital raised through the issuance of either a secured or unsecured loan. The way it works is that the borrower repays the loan along with interest at the end of the agreed period.

This differs from equity financing where capital is raised from investors who, in return, are entitled to a share of the profits. Debt financing can fall under either long-term debt financing (for the acquisition of equipment, buildings, land, or machinery) or short-term debt financing (usually for day to day operations of the business).

Here are some of the biggest pros and cons of this form of borrowing:

Pros

1. The biggest advantage of debt financing is the fact that the lender is not looking for a stake in your company. Therefore, you remain in complete control of the business. The sole purpose for the lender is to recover the principal along with interest income, not to take control of the company.

2. The interest on borrowed money is tax-deductible. Exemption from paying tax on business income lowers the tax liability of the business.

3. You know well in advance exactly how much principal and interest you will pay back each month. This makes it easier to budget and make financial plans.

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Cons

1. Debt financing can be expensive. This is due to the fact that the business owner is responsible for paying back principal plus accrued interest, which varies based on a number of factors covered in our e-book.

2. If you have a secured loan and find yourself without cash at the time of repayment, you risk losing something important to you or your business. This is because payments must be made no matter the circumstance.
3. Debt financing can be a bit more difficult to access. Certain lenders take precaution when lending money to high-risk enterprises and may ask for collateral of equal value to the loan.

Conclusion

It is vital for businesses of all shapes and sizes to understand financing needs before deciding on the right financing solution. Contact us today to learn more about how we can help you choose the right model for your business!