Understanding Debt Financing

Understanding Debt Financing

Debt financing is the mechanism where you obtain money or financial help with the promise to make a series of repayments in installments over a period of time. These installments have an interest that is agreed upon by the parties involved. This is one form of debt financing. The other form is where a firm or a company sells their stocks to the public in order to raise their financial status. They can also send bonds and bills to individuals or to other companies with a promise to repay back the amount with interest.

Small businesses might opt for debt financing in order to be able to expand or purchase assets that are important to the business. There are advantages involved with debt financing for small businesses as highlighted below.


A business owner can opt for debt financing in order to maintain their independence in their business. They do not want to be tied down by other parties that might come in as investors. As they own all the profits or loss that the business would make, they are free to make decisions without answering to anyone. By being independence, they are also able to make quick decisions without going through bureaucracy that is usually there when partners or investors are involved.

You pay less taxes

As a business owner, taxes can seriously affect your profits at the end of a business year. When you take debt financing, your business will be paying taxes on the interest rate for the financing. This drastically reduces the amount of net tax you pay every year meaning that a part of your business has been shielded.

No profit sharing

One of the reasons that business owners opt for debt financing is that they will not have to share their profits. The minute a partner comes into play or an investor comes into the picture, it means that they will have to share the profits on ratio basis. This does not sit well with many business owners as they may find the amount of profits they are sharing out is so much more that what they themselves are getting.

Choice of loan

When you opt to get financing for your business, you have the choice of going for the small business management loans or the standard loans that bank offer. It is advised that a business person take the business management loan as they have less interests tied to them. The loan terms are better than the standard loans being issued so you will get a good deal.

Though debt financing is a good route for a business person to use, it has its shortcoming. You might need to use money that your business owns but find that it coincides exactly with the day you are supposed to make an installment to your lender. You cannot afford to default any payment as a business as you will get a very bad credit rating from a bank or shortlisted. Once this happens, getting loans will be a nightmare.

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