A guide to debt financing

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There are typically two main types of business financing that companies can turn to: debt financing and equity financing. Debt financing is essentially funds that are secured for a business that they can use as working capital, for the use of purchasing specific assets, or other business operations. This money is paid back at a future date with interest and does not require a stake in ownership like with equity financing. Debt financing is routinely the more popular form of financing. 

Different types of debt financing

Debt financing is essentially comprised of three main structures:

  • Installment loans: This is when a business receives a lump sum up front with the full amount plus interest being paid back over time. These types of loans usually have a set, fixed payment schedule. These loans can be both secured and unsecured, with some examples being term loans or equipment financing. 

  • Cash flow loans: This type of loan is when a company is given a lump sum, but instead of a repayment period being set up, company’s repay the loans as they produce the cash. This means the loan is paid back with the incoming cash flows of the business. An example of this is invoice financing. 

  • Line of credit: Using a line of credit or a revolving loan gives companies a set amount of money that they can pull from and use as needed. This type of loan differs from an installment loan because a company is allowed to “withdraw” different amounts from the lump sum and only accrue interest on what they use, and once they repay what they have borrowed, the line of credit resets. 

Advantages to debt financing 

The biggest advantage that business owners gain from utilizing debt financing is essentially maintaining control of their company. This is a big advantage because with equity financing, lenders can become a co-owner. They may want a say in the day-to-day operations and other business decisions. However, even with debt financing, if someone defaults on the loan, there is a risk that business assets can get seized by the lender to recover their losses. 

Another huge advantage to debt financing comes during tax season. Oftentimes, companies can utilize section 179 to write-off the full purchase price of a qualifying piece of equipment the year it was purchased. Companies can also section 179 to write-off the depreciation of the asset instead. 

Also, since there are several different types of debt financing for businesses to choose from, it’s likely that any business will be able to find the form of debt financing that best meets their needs. While each business takes on debt financing, they are also building business credit and improving their business score. Building credit will only increase their chance of qualifying for future debt financing. 

Contact us

When your business is in need of debt financing in the form of equipment financing or an equipment revolver, then contact us. Our team is ready to help. 

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