Debt is essentially a fact of life for businesses. Perhaps the biggest challenge that they face is securing enough capital to operate and grow. Lack of capital is one of the biggest reasons for business failure. For that reason, an estimated 56% of businesses seek some type of funding. One of the primary ways that businesses secure funds is through debt financing. 

Why Do Companies Take on Debt Financing 

Companies large and small take on debt financing for five primary reasons. The first is to secure working capital to provide funds for short-term operations. That can include having funds to bridge any gaps between supplier payments and customer orders and having capital to maintain positive cash flow during seasonal swings or slow periods. The second is to purchase assets including investments in new equipment, machinery, vehicles, or technology. The third is to get funding to propel business growth. That can include funds to open new locations, expand an operating territory, hire more staff, increase marketing activities, move to a bigger building, and expand products and services. Fourth is to have funds to start a business. Fifth is to retire expensive debt or restructure existing debt to reduce interest costs and monthly payments and to make financial planning easier. 

What is Debt Financing and How Does it Work 

Debt financing is simply the process of securing capital by borrowing money from a bank, lender, or alternative lender. The money will be repaid later, including interest on the funds borrowed. Debt financing also includes funds secured through peer-to-peer lending and government-subsidized loans. 

The advantages of debt financing are: 

  1. The business does not give up ownership or control of the business (as it would by securing funds by trading equity in the business for cash.) The business is simply obligated to make timely payments for the life of the loan.
  2. An attractive feature is that there are tax deductions for the principal and interest payments on the funding. 
  3. There are funding solutions that come with low-interest rates. 
  4. By securing debt financing and paying off the loans in a timely manner, your business will build its business credit, which in turn helps to secure additional funding when needed. 
  5. Debt financing can help a small business avoid taking on expensive debt, such as that found in credit cards. 

The disadvantages of debt financing include that you must pay a lender even if your business goes broke. Qualifying can be difficult because your business will need a strong credit history. You must be operational for a minimum time and meet a revenue threshold. You may need to pay a high interest rate and provide collateral for the loan’s security. There can be an adverse impact on a business’s credit score if the debt cannot be paid back on time. Additionally, debt financing can be risky for a business that experiences inconsistent cash flow.                            

Get Expert Alternative Financing Assistance 

Contact Multiple Financial Solutions, with offices in Jacksonville, FL, and Houston, TX. We offer a portfolio of alternative funding solutions for companies that can’t get funding from banks including business lines of credit, merchant cash advances, and commercial real estate funding. We focus on businesses that have been active for 2+ years and are looking to grow to the next level. If you are facing a funding deficit, we are ready to help you.