Debt Financing
Debt Finance is an option to access small business funding in which the business entity borrows money that must be repaid, usually with interest.
Examples of debt finance include: Loans, Lines of credit, Business credit cards, and more.
Read on to learn more about debt financing for small businesses.
Advantages & Disadvantages of Debt Financing
Advantages
- You keep all of the ownership – no dilution of equity
- Easy administration
- Predictable/ easy to plan for
Disadvantages
- Repayment
- Impacts credit rating; Collateral needed
- High cost; Restricted cash flow
- Strict requirements
Types of Small Business Debt Financing
Traditional Bank Loans
A business loan gives you access to capital so you can invest it into your business. The funds can be used for many different purposes including working capital or improvements including renovations, technology and staffing, business acquisitions, real estate purchases and more.
SBA Loans
SBA loans are business loans partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, usually banks. These loans have tight lending standards, but if you can qualify for an SBA loan, their flexible terms and low interest rates can make them one of the best small business loans.
Business Credit Cards
Business credit cards are designed for use by businesses, as opposed to personal credit cards, which are used by individuals. For small business owners in particular, having a business credit card can be a good way to keep their business and personal expenses separate for bookkeeping and tax purposes.
Lines of Credit
A business line of credit is a flexible business loan that works similarly to a business credit card. Borrowers are approved up to a certain amount and can draw on their line of credit as needed, paying interest only on the amount actively borrowed.
Where To Go For Small Business Debt Financing
Traditional Banks
Start by contacting a bank with which you have an existing relationship. If you don’t have any, start by searching local banks in your area. These institutions are a great resource for small businesses financing because they have a strong interest in economic development in the community.
Traditional banks cover term loans, business lines of credit, equipment loans, commercial real estate loans, and business credit cards.
| Pros | Cons |
|---|---|
| Typically have low interest rates and competitive terms | Can be difficult to qualify for – Strong personal credit, Established business revenue, and 2+ years in operations are typically required. |
Online Lenders
These are nonbank lenders that offer business loans online. They offer fast cash, with several able to approve and fund applications within 24 hours. They offer a variety of financing options, including term loans, lines of credit, and invoice financing.
Online lenders can be used to cover a wide range of expenses, such as working capital, expansion costs, debt consolidation, and purchasing inventory or equipment.
For an expedited process: Go to Funding Circle (traditional term loans)
For an flexible lines of credit: Go to Bluevine, OnDeck, and Fundbox.
| Pros | Cons |
|---|---|
| Better for business owners who are facing credit challenges because they offer more lenient approval criteria | Cost of borrowing is generally higher – with interest rated anywhere from 10% to 79% |
| May be able to access funding faster | Fees may be higher than other types of financing |
| Pre-approval process may be available | Cost of funding may not be as transparent or easy to understand |
For an expedited process: Check out to Funding Circle (traditional term loans)
For flexible lines of credit: Check out to Bluevine, OnDeck, and Fundbox.
Credit Unions
Credit unions offer favorable rates and loans backed by the SBA. The co-op nature of credit unions ties them to the community, so you may reap the benefits of more personal relationships, but you usually need to apply for membership to qualify.
Credit unions cover SBA Loans, lines of credit, traditional term loans, and business credit cards
| Pros | Cons |
|---|---|
| Smaller and more localized: More personal relationships and name recognition | Usually need to be a member to qualify |
| Generally favorable rates |