All You Need To Know About Debt Financing – The Pros And Cons

By  //  September 9, 2022

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Being a business owner, especially a small one, you might be aware of this one. At times, you might have needed one as well. In small businesses, the need for this arrives a bit more than the large corporate chains. Even though you know debt financing, at the same time are you sure everything you know doesn’t have another side to it?

Introduction to Debt Financing 

It is borrowing money and that too from an outside source. This comes with the promise of returning the debt amount with a fixed interest rate which gets decided before both parties agree to it.

Loans and banks both are simultaneous terms that your mind thinks of. But, there’s more to it. This can be from some third parties or some external source who can help you with cash loans

Now that you know about it, let’s proceed to the pros and cons of debt financing. 

The Negatives

Interest rates

Interest rates on debt financing are the first con that makes business owners give this option another thought. Although the interest rate gets decided initially. But as it increases with time, under any circumstances if the business owner fails to return that on time. That’s where debt financing can become a nuisance. 

Business cash hassle

No business is sure of its profits and cash flow until they have a strong strategy that promises to drive that. In other cases, this can be an obstacle in the path of successful businesses. If a business faces any hurdles with its cash flow, returning the debt can become a hassle. 

Debt return 

In the end, it all boils down to return the debt. Both the above-mentioned reasons, interest rates and business cash hassle are large contributors to it. If the business opts for debt financing and finds it difficult to meet the interest rate due to difficulties faced in the cash flow. Hence, it’s harder to return the debt then. 

The Positives 

Tax return on debts 

Unbeknownst to some, taxes are frequently an important factor to take into account when deciding to apply for bank loans for your business or not. Why? The interest and principal payments on financing options are frequently categorized as operating costs. 

In some instances, the government shares a percentage of ownership in your company with you (your tax rate).

Low-interest rate 

Paying off interests can be scary, what if you’re not able to pay that debt off thanks to interest? At the same time while your government partners with you, i.e. through small business loans. The interest rate is kept lower and it’s low enough for you to pay it off with a smaller percentage.

You get to be the boss 

This will help you to gain ownership of your business. This is by the loan you receive, initially that’s the only option you have before you establish your business. Meanwhile, if you keep a strong business strategy, you’ll make enough sales to have a smooth cash flow. Plus, you get to be the boss now. 

The Takeaway 

Debt financing can be scary and exciting at the same time due to the negatives and positives it offers. Being in an initial stage and wanting to start a business needs investment and even if you don’t have that, the government will help you out with debt financing options. Have strong research, make sure you have a strategy and you’re good to go!