Debt Financing

In moden times debt financing has been a major method used by business to finance their operations. Debt usually refers to that which is owed. Refering to asset, debt is a means of using future purchasing power in the present time before a summation has been earned.

Debt financing is the process where firm raises working capital or capital expenditure by selling bonds, bills to institutions or investors. The investors become creditors and receive a promise for the payment of the principal and interest at an agreed rate and time.

Types of Debt

Small business uses different type of debts to finance their operations. These various debts can be divided into the following categories.

1. Secured Debt

A debt is considered secured if creditors have recourse to the asset of the company on a proprietary basis or in case of general claims against the company. secured debt is divided into the long term and the short term debt.

2. Unsecured Debt

In unsecured debt the creditors do not have recourse to the assets of the borrower to satisfy their claim. This makes unsecured debt very risky to the creditors. As a result of this risk, the unsecured debt normally attract high interest.

Effect of Debt Finance on Small Business

Knowing the effect of this type of on small business is necessary before making it a choice of finance for your small business.

Debt appears as a liability to the company. Capital and interest repayment is made regardless of the business cash flow. In the event of bankruptcy debt holders are secured and they will be paid first.

This type of is easy to secure by small business. This can easily be done through a bank or financial institution. Another advantage of this type of finance is that it does not dilute the ownership of the business. src="">

Advantage of debt over equity

The following are some of the advantages of debt over equity financing: over equity financing:

1. Utilization of Resources

When a business use debt to finance its operation, they got no option than to fully utilise their resources because they will have to payback the debt and interest to their creditor.

2. Short Term Needs Debt finance can easily be secured on a short term bases. This make it very advantagious to the small business as finance of this type can easily be secured for short term business needs.

4. Tax Advantage Debt financing also offers tax advantage to business as interest is deductible for income tax purposes.

Other advantages includes:

• Lenders has no direct claim on future earnings

• Debt does not dilute the ownership of your small business.

• Lenders are only entitled to loan repayment and interest on loan.

• Interest and principal repayment are based on fixed percentage and can be forecast.

disadvantage of debt over equity

1. The main disadvantage of this type of financing is that it requires a small business to make regular monthly payments of principal and interest.Because of shortage of cashflow experience by young business it is usually difficult to make regular payment of to creditors.

2. Most lenders provide severe penalties for late or missed payments, which may include charging late fees, taking possession of collateral, or calling the loan due early.

3. Failure to make payments on a loan, even temporarily, can adversely affect a small business's credit rating and its ability to obtain future financing.

4. Another disadvantage associated with debt financing is that its availability is often limited to established businesses. Since lenders primarily seek security for their funds, it can be difficult for unproven businesses to obtain loans.

5. The amount of money small businesses may be able to obtain via debt is likely to be limited, so they may need to use other sources of financing as well

Useful Link

Debt Affiliate Program--At Debt Affiliate Program you can make money with debt affiliate leads.
Its your chance to make money. Register with debt affiliate and start making money. Simply place the code on your site and create quality leads.

Debt Settlement--Get out of debt
Debt settkement tools provides valuable tools, guide and resources that will enable a small business owner and an individual get settle his debt with his creditor and become debt free.

Debt Settlement blogs
Debt settkement blogs provides valuable tools, guide and resources that will enable a small business owner and an individual get settle his debt with his creditor and become debt free.

Need Help With Debt
Get practical advice, guide and help with debt . Are you indebted, is your mortgage payment a problem, do you need help on how to be debt free? Get practical advice and guide here.

Have A Great Story or a Question About This Topic?

Do you have a story or a question about this? share it.

[ ? ]

Upload 1-4 Pictures or Graphics (optional)[ ? ]


Click here to upload more images (optional)

Author Information (optional)

To receive credit as the author, enter your information below.

(first or full name)

(e.g., City, State, Country)

Submit Your Contribution

  •  submission guidelines.

(You can preview and edit on the next page)

Return To Home Page From "debt financing"

Small Business Financing

160x600 Wide Skyscraper More Offshore

Small Commercial Loans

Do you need a small commercial loan for your business, if yes then you are at the right part. Why not visit us at see for your self our small commercial loans avalable to business.

Apartment Loans

Do you need loan for your appartment, Come to us for a better quote for apartment loans.

Commercial Loans by Commercial Loan Direct