Debt financing is most appropriate for existing businesses that have a positive cash flow that already supports the interest and principal payments and are looking to grow. However, as consumers, we think debt is the primary source of new small business funding, which is not the case.
So, as we begin the discussion of debt financing, a basic concept to understand is that All Debt is Not the Same.
Moreover banks are not the only source of debt financing. In fact, banks are what I call dumb money and what most businesses need is smart money.
And, What You Think You Know About Credit is Just Wrong.
Moreover, when it comes to debt financing for a small business, it is all about understanding the concept of Operating Leverage.
And how to use operating leverage to Make Huge Profits.
Below is an excerpt from a video lesson from Boot Camp: Steps to owning your business that discusses the debt continuum.
Here is a post that describes the debt continuum in a little more detail:
When it comes to debt financing for a new small business, most loans are going to be made to the founder personally who will use the proceeds of the loan to buy equity in the business. If a loan is made to the business, it is generally for a highly liquid and tangible asset that can be repossessed by the lender and sold if the business fails to continue to make payments. Moreover, being a new small business will require that the founders sign a personal guarantee if for any reason the business defaults on the loan.
So, for a lender to offer any form of debt financing, they will put a lot of stock in the founder’s credit score. Here is what goes into a credit score:
When it comes to getting a loan from a lender, credit score is not the only factor they look at. There is what is known as The 5 “c’s” of Credit that are used by lenders to determine credit worthiness.
And here is how they control their risk and reward:
Many new business owners are confused about the role that the Small Business Administration (SBA) plays when it comes to getting a bank loan. Here are a couple of posts that I think describe the role that the SBA plays.
Finally, below is a post that includes a link to a step-by-step guide to Business Loans and Financing that provides a comprehensive list of lenders and reviews and additional descriptions of the many terms used in debt financing. If debt financing is right for you, then I encourage you to explore the link in the following post.
