There are many options to consider when raising money for a business including debt financing. Debt financing is the act of borrowing money from an outside party with the agreement that you will pay the initial principal back with a negotiated level of interest. Don’t let the “d” word scare you, this type of financing is used for many businesses. There are some advantages and disadvantages to taking this funding route - the following list shows some pros and cons of debt financing.
PROS
Ownership: An attractive aspect of debt financing is the ability to maintain ownership of your company. Banks and lenders are not looking for a stake (or any other involvment for that matter) in your company so you remain in completel control of your business direction.
Acquisition Proceeds: Unlike working with VC funding, there is no exit agreement to pay out a certain percentage to investors if the company is acquired. Instead, all proceeds go straight to the company and does not get split up among banks or lenders.
Tax Deductions: In most cases, any interest paid on the business loans are considered “business expenses” and are tax deductible.
CONS
Repayment: Bank loans are strictly monitored and must be paid on time regardless of what kind of month your business may be having financially.
Credit Rating: Debt financing is considered an acceptable form of business funding, however, if your business relies too heavily on it then it can affect your overall credit rating (making it more difficult to secure funds in future rounds).
Cash & Collateral: Banks and lenders may ask for collateral of equal value to the loan in case you default on your payments. If you find yourself without cash at the time of repayment you risk losing something important to you or your business.
