One question people often asked is; what is debt financing? They could be scared of the word ‘debt’ but there’s no need to worry. Debt financing doesn’t mean people will chase you because they feel you owe them some money. It doesn’t mean a company will be on your neck for the money you owe them.
What debt financing means is the actual effort of raising capital by borrowing money from a lender or from a bank. The money ought to be repaid in a short while.
However, on the other side, creditors (those who loan money out) will be owed interest on the money borrowed.
Most of the time, lenders or creditors require monthly payments from debtors. The payments could even be required in two weeks in some cases. The most important thing is that both the creditor and the borrower have a clear agreement on how the money is to be paid.
The other side of debt financing
On the other side, debt financing is a peer-to-peer lending. Other lines of credit and government-subsidized loans are also debt financing.
The advantage is that these loans are designed to make it easy on the borrower. Therefore, small business can get the capital they need with reduced risk.
Who’s debt financing for?
Take for instance a small business owned by a young woman. She supplies food, equipment, and accessories. Lately, the business has been booming.
Now, the woman is looking to expand the business by opening another location for her business because she wants to meet more demands and reach new customers.
However, she needs more money and she doesn’t have that kind of money.
If she decides to go to her bank to secure a business loan, she’s into debt financing. The creditor, who in this case is the bank, will work out how many months she will pay back the loan and at a certain interest.
That’s debt financing.