Debt Financing: 5 Things Small Business Owners Need to Know

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Over 80 percent of businesses fail because they can't manage their cash flow. Luckily, debt financing can get you the cash you need to make it until you start profiting.

But what is debt financing? Is it worth taking out a loan to grow your business?

Keep reading to learn more.

1. How It Works

Debt financing is the process of getting money for your business that you will have to pay back later. You can get this aid from banks, the Small Business Administration (SBA) or individuals.

If you need funding for your business but don't want to give up any equity, this is a good option. You can find investors who won't require you to pay the loan back, but they will expect a cut of any profits.

2. Many Options

One advantage of debt financing for business is that you have many options. You can start with a loan at your local bank. If you can't get enough money there, you can look into SBA loans.

You can apply for a loan online, and you can access financial counseling. The SBA also offers some loans with smaller down payments and other benefits.

Another option would be to check out a site like where you can look for business funding and compare options.

3. Keep Your Business

When comparing debt vs. equity financing, consider what you give up in either case. Debt financing requires you to pay the money back to your lender.

Equity financing requires you to give some ownership of your business to your investor. The amount of equity will depend on the size of the loan and the value of your business.

While giving out equity may be the right decision, debt financing is better if you want to retain full control of your company.

4. There Are Limitations

Depending on the types of debt financing you use, you may not be able to do just anything with the money. Some loans may only be used to fund your employee payroll, while others are specifically for purchase orders.

You also have to consider how much you plan to take out. The more money you get with debt financing, the riskier your next loan will be for your lender.

Try to get a loan only for what you need. You can wait until you make a profit to pay for other things.

5. You Will Have to Pay

It doesn't matter if your business makes $1 million or $1. You will have to pay the balance on any debt financing loan.

This can be risky if you aren't sure if your business will make money. So keep that in mind when deciding how much to take out and when.

That way, you can fund your business to help make the profit you need to repay the loan.

Debt Financing Done Right

If you want to use debt financing to grow your business, you need to research your options. That way, you can choose the best loans for you.

Debt can sound scary, but it's essential for funding your new business. Once you get the money, you can start to grow your business more easily.

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