Starting and running a small business is not easy if you do not have access to unlimited capital. However, there are various ways you can get financing for your business including calling in investors, borrowing from friends or getting business loans.
Debt financing is a type of loan where you do not have to give up any ownership of your business but there are strict conditions on how to repay the loan. You can borrow money and sign a contract with details on how much interest you need to pay and which dates you should repay the loan. In case you do not meet these debt requirements, there are severe repercussions. In some countries, the interest on debt is a deductible expense, therefore if the company is profitable; you may pay less in the effective interest cost. Keep in mind that having too much debt as a company will increase the cost of borrowing money in the future as well as adding risk to the company, getting a debt review would be the best way to manage debt.
If your business is in dire need of financing, you can get both secured and unsecured loans. With secured loans, you need to give some form of collateral to assure the creditor that you will repay the loan. The collateral can be used to satisfy the payment in case you default in paying back the loan. Many lenders often give secured loans in debt financing because it carries less risk.
Some of the securities you can use to back your loan include:
- Guarantors: You can find guarantors to be part of the loan agreement. Guarantors are supposed to guarantee the payment of the loan in case you default on the payments.
- Endorsers are quite similar to guarantors but they may be required to also post a collateral
- In case you have commercial equipment such as vehicles and machinery, you can also use as much as 65% of the value as collateral for a loan.
- Publicly held companies can offer securities such as stocks and bonds as collateral for a secured loan.
- Real estate can also be used as a security, whether it is commercially or privately owned. It can count as collateral with up to 90% of its assessed value
- If your business is trying to lease property, you can use lease payments as collateral if the lender is the same individual who holds the mortgage on the property.
- Having a personal or business savings account can also work for your business in debt financing. Savings accounts and certificates or deposits can secure a loan.
- 95% of a policy cash value can be used as collateral in a secured loan if you have an insurance policy
- You can also leverage your business’s receivable accounts as collateral for a secured loan allowing the creditor to advance as much as 80% of the value of receivables as soon as you ship your products
- Your warehouse inventory can secure only about half of the loan while the display merchandise can secure the loan through floor planning.