How does debt
financing work and
what does it involve?
Businesses borrow money in many ways. These will include, bank loans, asset finance, and invoice discounting. With each facility the amount that can be borrowed will depend upon the amount that the business can repay, and the value of assets it can offer as security. To these should be added the history of profitability, how the funds will be used, a history of good or bad debt repayment.
Debt finance does not involve any loss of ownership but does place an obligation to repay upon the business, this can be a burden when times are tough. For this reason, it is wise to only borrow a sum, and over a period, which will allow repayment with some room for unforeseen circumstance.
Ideally, the debt to finance a business purchase will come from several sources. This will allow the business to match its debt obligations more accurately to its income and assets. Legal paperwork is simple and inexpensive.