DEBT FINANCING.

Debt is popularly unpopular because of the negative effects that is has on people who take it.

Debt is basically when you borrow money from an outside source in order to finance any of your requirements and you have to pay the principal back along with payment of interest that is at an agreed upon level.

Although debt always comes with a negative connotation it is not that bad if you know how to handle it properly.

If you are starting a small business you would almost all the time need to borrow money for start-up capital or look at an option such as refinance mortgage loans.

This is not bad. In fact, if you face difficulties later on to handle these debts you can get advice on debt consolidation the process of incurring debt in order to finance your small business is known as debt financing.

Usually debt financing is done by banks but it can also be issued by a private company or even a friend. 

Outlined below are the advantages and disadvantages of debt financing so that you can be equipped with proper information to handle your debt financing better.

Advantages of debt financing:

• Maintain ownership – Borrowing money from the bank or another lender would require you to make the payment agreed upon within a given period of time. The good thing about this is that your obligation to the lender ends there. You are not answerable to anyone regarding how you choose to run your business. Thus you can do things your own way without outside interference.

•  Debt is tax deductible – One of the greatest advantages of debt financing is that the principal that you borrow and the interest rates that you have to pay on a business loan are considered under business expenses and thus are business income tax deductible.

•  Lower interest rate – You should consider the impact of tax deductions on the interest rate the bank is charging you. Say the bank is charging an interest of 10% while the government tax rate is at 30%. In such a case you stand at an advantageous position to take a loan which you can deduct. After the tax deductions are over, you will be paying your loan at a lower interest rate that the original one offered by the bank.

Disadvantages of debt financing:

• Repayment on time – If you take a debt, it is your obligation to pay it back. There are no ifs and buts about this and even if your business fails you have to return the amount that you had borrowed. If you are forced into bankruptcy, then your lenders will have to reclaim their payments first before any equity investors.

• Impact on your credit score – Although it may seem like a good idea taking on a debt for financing your business but you should remember that each loan you take is noted in your credit rating.

Thus now that you know the pros and cons of debt financing you can handle your business debt better.

Jason Holmes is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites.

His expertise is woven around various aspects of the debt industry and with his e-books he tries to impart to people the different situations and simple solutions to get out of difficult situations.

Some of his works include e-books like ‘Credit Score The Quintessential Therapy for a Happy Pocket’, Take Creditors and Collection Agencies to Small Claims Court’ and, My Story- From Depression To a Smile’.

Debt financing a solution to many problems.