by Uday Tank
Debt funding, in simple terms, is a way of raising the capital needed in the establishment or development of a business enterprise. To start any business, you need capital, and in order to raise this capital, you need to have a business. However, there are many people who don’t plan to raise venture capital anytime soon. So, is debt (in the forms of loans) the right route to follow? The appropriate answer to this question depends on so many factors, which will be discussed in the context of this article
To determine whether a business startup should adopt debt funding, the business owner needs to answer these questions:
- Personal financial status
- Existing source of income
- Interest in business control
- Do you meet the requirements
- Is equity investment accessible
Personal Financial status.
In order to determine whether or not a business startup should embrace debt funding, the business owner needs to check his personal financial status. Sometimes, entrepreneurs kick-start a business agenda because they already have a personal financial back-up. In simple terms, they can afford to fund their business themselves. In such a scenario, debt funding is obviously not required. For instance, if your net worth reads $10,000 and you want to embark on a small online business which would require an overall startup capital of $2000. You may choose to raise this capital from within your financial reserve, since you have more than enough to go around. So, in this situation, the question of whether a business startup should adopt debt funding doesn’t apply to you.
Existing Source of Income.
It is one thing to owe debts; it is a completely different thing to pay back. When you don’t have enough cash to fund your business idea, and you don’t want to adopt venture capital, debt funding may be your best bet. However, it is not enough to desire to take loans because you have to consider the repayment plans too. When you want to commence a business, keep in mind that the business might not yield rewards in the first few months of establishment, so you cannot afford to take a penny from it to fund any existing debt. This is why you need to ask yourself the honest question of whether your existing source of income is sufficient to payback your loans. If you don’t have a good savings plan or sources of income, debt funding isn’t appropriate for your business startup because you would struggle to meet the repayment requirements, except if you adopt some debt management strategies like IVAonline.
Interest in business control.
Do you wish to be in total control of your business? If so, debt funding, and not equity investment, is your best bet. Many business owners who wish not to share the control and decisions in their enterprise often opt for debt funding because it ensures that no other party gets to decide for them. If you have raised the funds for your business through equity investors, chances are you will have to share the ownership of your business with these investors, and this would take away your liberty to solely make decisions in the business.
Do you meet the requirements?
Yes, a business owner should adopt debt funding in order to finance their business, if he/she meets the requirements to qualify for these loans. Once again, this might be another stumbling block in an entrepreneur’s attempts to secure debt funding because many of the lenders, usually banks, have some requirements and criteria to be met. And even though you desire to obtain these loans, they wouldn’t grant them to you if you don’t meet the conditions. Some of the requirements may include collateral, guarantors, interest, events of default, credit score, pre-payment, application fee and lots more. By and large, you should only attempt to use debt funding to finance your business if you meet the lender’s conditions.
Is equity investment accessible?
Most times, it is always better to seek out equity investors, when you cannot afford to meet the conditions for debt funding like existing income and collateral. However, there are times when you may encounter difficulty finding an investor interested in your business idea. In this situation, your ultimate alternative is debt funding. So, a business startup should use debt funding as its primary source of finance if the business owner is unable to secure an equity investor.
Uday Tank has been working with writing-challenged clients for over five years. His educational background in family science and journalism has given him a broad base from which to approach many topics. He especially enjoys writing content after researching and analyzing different resources whether they are books, articles or online stuff.