- When starting a business, you need funds to help you get going. If you don't want to give away any control of your business--as you would have to in equity financing--you should consider debt funding to get the money that you need. Debt financing puts you into debt, but you'll be able to repay the money with the funds you earn through your business. Understanding the different types of debt funding is key to making a wise choice.
- Bank loans are the traditional way to raise money for your business. An unsecured loan requires no collateral, and the banks base their decision on your personal or business credit score. If you want a secured loan, you'll have to use collateral--personal or business property--to back up the loan. If you default on the loan, the bank will take this property. If possible, try to get an SBA loan, which is a low-interest business loan that's backed by the government's Small Business Administration.
Lines of Credit
- In a line of credit, the bank tells you that you can borrow up to a certain amount of money, but you are not required to use the full amount at once. The advantage to this is that you are only paying interest on the amount that you are using, but the rest of the money is available if you need it.
- Business credit cards are easy to obtain if you have a good credit score. In fact, you'll often get pre-approved offers when you register your business. The downside to financing your business with a credit card is that it often comes with higher interest rates than other types of financing.
- Some companies will offer you an unsecured cash advance on your credit card receipts. When you do this, you'll have to transfer an agreed-upon percentage of the amount of money you make on credit card transactions to the loan company.
- Mezzanine funding is an option when you've maxed out the traditional loan options. It is secondary to your main loans and comes with a higher interest rate because there is a higher chance that you will default on this loan. An example of a mezzanine loan is a loan to cover the cost of the down payment on a commercial mortgage.
- In a debenture, a company sells bonds to investors. There is no collateral--the company is in debt to the people who bought the bonds. At the end of the term, the company must repay the money with interest.