subject: Should I Borrow Money To Start My Business [print this page] Finding start-up capital for a business can be a challenging undertaking. Whether you are just starting out or trying to take your business to the next level, you need additional cash to make it a reality. Likewise, small business advisors recommend having at least six months worth of operating capital when calculating start-up expenses.
What Is Debt Financing?
When financing a new venture, one of the main options available to most business owners is debt financing. Debt financing refers to loans from a number of sources including banks, government agencies, etc. A loan is the most common first set of financing for most small businesses and studies show that roughly 50 percent of small- and medium-sized enterprises depend on such funding for expenses such as buying equipment and other tangible assets. The main characteristics of a loan include mandatory reimbursement and a fixed rate of interest on the principal amount.
Advantages Of Debt Financing
With debt financing, you are in control of your own destiny regarding your business. You do not have investors or partners to answer to and you make all the decisions. Most importantly, you own any and all profits you make.
Moreover, new small- and medium-sized business owners can draw on several sources for loans and long-term debt financing including banks, Small Business Administration (SBA) programs, etc. With many of these funding options, the interest on the loan is tax-deductible. As a result, these programs help shield a significant chunk of your business income from taxes in addition to lowering your tax liability every year.
Many of these loan arrangements also have more favorable terms for small businesses than traditional commercial bank loans. If you can borrow at least a portion the money from a friend or family member, you may be able to negotiate more flexible repayment terms than a commercial lender would permit including lower rates of interest and steering clear of paying loan fees.
Disadvantages Of Debt Financing
The disadvantages of borrowing money for a small business are many. In many cases, new business owners are weighed down with large loan payments at precisely the time when they need funds for start-up costs. Not making the loan payments can ruin the owners credit ratings and make borrowing in the future difficult or impossible.
Many commercial banks also require you to assign a security interest in your property to obtain a loan, which may place your personal assets at risk. Moreover, there is always a possibility of legal action against the borrower over any unpaid balance of the loan, even if it is unsecured. Finally, any time you use debt financing, you are running the risk of bankruptcy.
To conclude, deciding whether to borrow money or not is a complex decision depending on a number of factors including your personal financial situation, the terms of the potential loan, and the type of business you plan to open. In such a situation, it is recommended that you take the advice of a financial consultant who specializes in small business issues in exploring your individual choices.
by: Jane M Dawson
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