Debt Financing

Debt financing refers to what we normally think of as a loan. A creditor agrees to lend money to a debtor in exchange for repayment, with accumulated interest, at some future date. The creditor does not obtain any ownership claim in the debtor's business. Debt financing is attractive because you do not have to sacrifice any ownership interests in your business, interest on the loan is deductible, and the financing cost is a relatively fixed expense.

In this discussion, we're going to look at debt financing, including:

• Selecting a bank or conventional lender: what are your options and where are you most likely to obtain the best loan for your business?
• Common types of bank loans: what kinds of loans are available, and what are the practical considerations for small business owners?
• Direct and indirect costs: what are the expenses and demands of a bank loan?
• What banks look for: credit history, collateral, cash flow, and character as they relate to different kinds of small business loans, and the documents you'll need to get a conventional loan.
• Asset-based financing: how accounts receivable and inventory can be used as collateral.
• Leasing: renting can be an alternative way to finance equipment purchases.
• Trade credit: suppliers can often provide an easily available way to supplement conventional borrowing.
• Life insurance companies: your existing policy can be a source for low-interest policy loans.