Ginko Financial

Are you interested in business debt financing? Before you go any further, it is important to understand some terms. Debt financing is when a business owner borrows money or applies for a loan to run the business; in other words, capital.  Ideally they should be affordable to maintain.

There are 2 types of business debt financing: Long-term and short-term. Long-term is the category given to the assets purchased by the money you borrowed; for instance, land, machinery, building, and equipment. Long-term debt financing applies scheduled loan payment that considers the length of the properties’ or assets’ usefulness, which typically goes beyond one year. Short-term debt financing on the other hand are those that refers to whatever is needed for the daily operations of the business; examples are: money for employees’ salary, supplies, or inventory. But just like anything else, business debt financing has its pros and cons.

Pros – Business debt financing still allows you to maintain ownership of your business. Since, you are just borrowing money, your only obligation is to meet your financial responsibilities to the company you borrowed money from. In the same manner, the creditor’s responsibility is to lend you the money once you have qualified for financing and to follow-up on your loan payments; but they are not entitled nor allowed to meddle in the operation of your business, or to claim ownership thereof.

Tax deduction is one advantage of business debt financing. The reason for this is that loans and such are categorized and written in the company’s financial records as company expenses, and such expenses are deductable from your business income tax.

Cons – The hassle of repayment. Why hassle? you are given money to run your business, but you have to give back the money that was given to you. Thus, you must make sure that you are able to settle financial responsibilities religiously to avoid future problems. But what if the business got worse even after business debt financing? All the more you will be in deeper financial trouble, forcing you to file bankruptcy. But then again, filing for bankruptcy does not get you off the hook because the company who lent you money would first claim whatever is owed to him, before your investors can claim theirs. In other words, even if the creditor got what was due him, you are still faced with your obligations to your investors, if there are any.

High interest rates. This appears confusing as business debt financing is supposed to benefit your income tax; so, why the high interest rates? The reason for this is that interest rates are dependent on the entire economic condition on a large scale, your bank account history, personal credit score, as well as the credit rating of your business.

It would be best that before you consider business debt financing, one must carefully study whether it is indeed necessary. And if so, then, it is also important that one must know and understand how it works so that whether financing is long-term or short-term, one would be able to fully benefit from it.