Debt Financing: Definition and Examples

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What Is Debt Financing?
How Does Debt Financing Work?
Short-term Debt Financing
Long-term Debt Financing
Pros and Cons of Debt Financing
Pros of Debt Financing
Cons of Debt Financing
5 Examples of Debt Financing
1. Traditional Loans
2. Online Loans
3. SBA Loans
4. Short-term Business Loans
5. Business Line of Credit
Choosing Debt Financing for Your Small Business
You need capital quickly. There are various forms of debt financing that get funds in a business bank account much faster than equity financing or most other alternatives. You’ll want to focus on online options if you’re truly strapped for time. You want to maintain full ownership of your business. Lenders don’t want an ownership stake in your business, only the certainty that you can repay that debt. While taking on debt means making a payment with interest each month (compared to no payments with equity financing), it may be worth it if you’re not prepared to give away a percentage of your company and/or do not want to share future profits. You anticipate a positive return. While debt financing comes with costs, you may be able to recoup those costs (and more) if the money you borrow leads to an investment that can bring in a significant increase in revenues – a concept known as leverage. For example, if you take out a $150,000 loan with an 8% annual percentage rate (APR) but can get a 15% return on that money, debt financing can be a smart business move. You’re comfortable with risk. If you put up collateral or sign a personal guarantee for a business loan, failing to repay the loan could cost you important business or personal assets. Even if you get an unsecured loan, your company’s credit score will be on the line. These are risks you have to be willing to take if you choose debt financing.
Alternatives to Debt Financing
Angel investors Crowdfunding Venture capital firms Corporate investors Listing on an exchange with an initial public offering (IPO)
Equity Financing vs Debt Financing
Similarities
Differences
The Takeaway
Frequently Asked Questions
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About the Author
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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