Debt Financing

So, you have decided to take out a loan. You must go to the bank or another lending institution and fill out an application. The process is like mortgaging a home, or buying an automobile so you may already be familiar with this type of financing, even if it is now for your company.

First, the bank will do a credit check. If you are a new startup, the bank will check your personal credit history. If your company is already established, the bank will check its credit history through third party firms. When approved the bank will setup a payment plan and the interest assayed. Once negotiation is complete, you will sign into a repayment plan for the agreed upon terms.

There are several advantages to this kind of financing. The biggest is the lending institution gains no control over your company and can’t tell you how to spend the money. Once you’ve paid the loan back, your relationship with the lender is over. Another benefit of acquiring a loan is the intrest is tax deductable as a business expense. Also the payments are on a fixed schedule for the duration of the loan and can be used in forcasting.

There are a few problems with this kind of financing. Not always will your small start up qualify for loans, especially during an economic downturn like a recession. Banks clamp down because of worries about failed investments and make it much harder to qualify for loans. Also by adding debt to a company you assume you will always be able to pay for your monthly payments. This not be the case during a national state of emergency like the COVID-19 pandemic where businesses shut down by governmentally mandate.

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