For a startup company, financing is required for building profitability. As a startup business owner, first, you have to consider the amount of money you need to raise and the time required for procuring the same. There are various options including equity and debt financing for raising the money to run a new business. Among them, debt financing is the most preferred option as the expenses incurred in repaying the debt is less than that of equity financing. For more visit our website today.
What Is Debt Financing?
Debt financing deals with borrowing of funds from creditors with the stipulation of repaying the interest and principal amounts within a specified time. Under debt financing, creditors can enjoy the reward of the interest generated on account of lending the money to the borrower.
Nature of Debt Financing
Debt financing options may be unsecured or secured. Secured debts carry collateral terms while the unsecured ones do not have collaterals and place the creditors in less secure position in case repayment defaults.
In terms of the repayment schedule, this loan can be procured on a short or long-term basis. Short-term debt is used for financing current activities like operations, while the long-term debt is used for financing assets like machineries and buildings.
Now, you will be definitely curious to know about various sources of debt financing. These are
- Relatives and friends
- Commercial finance companies
- Government programs
Banks are popular sources of debt financing. Before processing the loan, these financial institutions ask startup companies to furnish a solid business plan and various collaterals. Banks also analyze the track record of the loan seeker. By providing documents including cash flow budgets, profit and loss statements and net worth statements, a startup company can borrow additional funds. For more visit A1 Business.
Relatives and Friends
As a startup owner, you can look for private sources of funding like relatives and friends to run your business. While referring a debt review, you will find that many financial planning consultants suggest business owners go for this option because your friends and family members trust you the most.
If you borrow money from your friends or relatives, the process should be carried out with formality as if you have borrowed the same from a commercial lending firm. This means that you have to prepare a formalized loan document, where you have to mention the interest rate, amount borrowed, repayments terms and even attach collaterals in case there is a default.
Commercial Finance Firms
You can consider commercial finance companies in case you fail to secure financing from other sources. These kinds of firms express more willingness on the quality of collateral for granting loans than analyzing profit projections or track record of your business.
Bonds can be issued by startups to raise financing for carrying out specific activities. Bonds are specialized forms of debt financing because the company issues the debt instrument.
Bonds are different from other financing tools because the business sets the interest rate and the time of repayment of the matured amount. In addition, the company is not required for making any on principal till the specified maturity date.
A bond bears face value. Face value is the price, which is paid during the time of issue. When a startup issues bond, it ensures to pay back the face value and the interest. From financing point of view, issuing a bond provides company with opportunities for accessing financing without having to make repayments unless it has utilized the funds successfully.
In the US, state, local and federal governments run programs that help startups to fulfill their financing goals. When you opt for such financing, you have to attach limited assets as collateral.
Therefore, running a startup business is not a problem as you can analyze these options and pick up one that fulfills your financing needs. For more visit company formation services in Singapore.