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Advantages and disadvantages of debt financing

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If you are looking for financing for your business, one of the first decisions that you will need to make is whether you will seek debt or equity financing. Each of these types of financing can provide the needed working capital for your business; however, you should know what is entailed with each option. Each type of business financing holds both advantages and disadvantages. Knowing what these are can help you to determine the best type of business financing, to meet your company's needs. Because most people use debt financing to get their business up and going, it is especially important to become highly familiar with it.Here is what you need to know about the advantages and disadvantages of debt financing-

Debt financing is done when you are borrowing money to get your business up and running, or provide an existing business with more working capital. Many people look at their own resources and then they will typically approach family and friends and/or banks and other lenders, for this type of financing. This type of financing is most often used by business owners, who are trying to start a business.One of the advantages of this type of financing is that you do not have to give up any control of your business. You can take the money and do what you want with it. In addition, the interest you will pay on your loan can be tax deductible, under certain circumstances. This means that you can lower your business tax liability every year. You should also be aware that there are many incentives, for small business owners, to take out debt financing. One of the other points to consider is while you do not have to give up control; you do not also have to share profits, like you would with investors. All your lender can expect from you is your loan payment on time.

However, you should also keep in mind that there are several disadvantages when it comes to using debt financing. For a new business it can be serious if you take on to much debt. If you cannot make the payments on time, your credit rating will be seriously damaged and you may make any future borrowing, nearly impossible. If you have borrowed from friends or family, it can seriously strain those relationships, as well. You should also consider that you may have to put up collateral on a business loan. This means that you may have to pledge your personal assets, before you get a business loan. This means that you could lose your personal assets if your business goes under. It is safe to assume that if your business carries a high rate of debt, the chances of bankruptcy are much higher too. You should keep in mind that you could also be facing serious legal ramifications. Many business owners are under the mistaken assumption that your personal assets are safe, if you incorporate your business. This is not always true. Any personal assets that you put up for collateral, for a business loan, will be lost if your business goes under.

Once you have studied the issue carefully, then you can make the right decision, for your business. Many business owners try to obtain debt financing, first and then if they can't they turn to equity financing. The final decision on what to obtain will depend heavily on the circumstances of the business and the business owner. You should consult your business plan and seek out additional guidance, from the financial professionals who are helping you, in order to make the right decision.

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