Debt financing has become a popular and effective trend in modern day business. Debt finance is the process through which lenders provide money to the borrowers with the agreement that borrower will have to pay the money to lender back within a certain period of time.
Business owners from different levels often require extra money for business expansion or to fund any startup and the option of debt financing has become a proven solution to fulfill all the financial needs in such a situation. However, today several varieties of debt financing plans are being offered by financial companies that lend money to new and well-established companies. Here are some debt-financing solutions that may work for your business.
Trade Credit
If you are running a small business, opt for credit from the suppliers with the understanding of paying the money later. However, if you require money to buy products for your startup, then the lender could supply products and instead of asking for immediate payment, the lender will extend the time till 90 days. Suppliers often offer a huge discount if the borrower pays back the money earlier than assured time period.
Bank and Credit Union Loans
Bank and credit loans are the most conventional type of credits mostly adopted by small businesses, which also known as “term loans”. If you have chosen this loan for our business, then you will have to be ready to pay installment every month along with the interest of total credit availed from the borrower.
However, such type of loans cannot be a suitable option for a startup or new projects, because it takes time to generate revenue from a new business and the borrower will not have much time for repaying the credit amount. Here are some difficulties you may face while applying for the “term loan”.
• Lengthy application process
• Require long list of documents to qualify for the loan
• Risk of losing collateral
• Entire required amount often nor granted
Factoring Company Loan
In order to avail immediate fund, many small business owners often sell a percentage of its accounts to a factoring company. However, such factoring companies collect money from targeted business clients or customers, but the problem is that factoring companies do not take full responsibility in collecting money from a customer. According to a debt review, the situation turns worse when customers stop paying and the lender becomes liable to repay the amount with interest to the factoring company.
Overdraft Agreements
The overdraft agreements can be written off between an organization and its bank, which is also known as “overdraft lines of credit”. In this process, the bank allows the organization to withdraw money till a certain limit, even if the organization has insufficient property or deposits to cover the credited amount.
Loan from Yourself
Business owners can utilize their own bank deposits or any property to avail loan from lenders with flexible terms and conditions. In such cases, both the parties sign a formal agreement and acknowledge that capital infusion is debt. However, business owners can lend money from relatives or friends, as they will probably not ask for any interest for the credit.
Peer-to-peer loan
The peer-to-peer loan can be another suitable option that does not demand the engagement of any financial institution. However, the efficiency of small business loan often depends on the current condition of the financial market and national economy. Thus, you should assess the market risk before applying for a loan for your organization.
Compare different varieties of debt financing and decide on a suitable one for your business.
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