What is debt funding?Debt funding, sometimes known as debt finance, involves borrowing money from a lender to be repaid at a later date. It’s the opposite of equity financing, in which a company raises money from investors who are entitled to a share of its profits in return. Mortgages and credit cards are both forms of debt financing. The primary advantage of debt financing is that you retain complete control over your business, which isn’t the case when you’ve got investors to answer to. It’s also easy to forecast expenses because loan payments are consistent and predictable. Businesses might seek out large amounts of long-term debt funding when they want to purchase a new piece of equipment or machinery. However, they might also look for a short-term loan to help them out of a difficult spot, such as a cash flow shortfall. Types of debt funding include asset-based lending, business loans, invoice finance, overdrafts, peer-to-peer lending and start-up loans. The UK’s major high street banks have traditionally been the go-to lenders for SMEs seeking asset finance. However, modern entrepreneurs are increasingly turning to specialist asset finance providers and peer-to-peer finance sites to meet their funding needs, according to the British Business Bank.
Why is it important to make your business attractive for debt funding?Regardless of which institution you turn to for debt finance, a prospective lender will want proof that you’re likely to repay a loan. If you and your business seem credit-worthy, you’re more likely to secure a loan at a favourable interest rate on favourable terms.
How to make your business attractive to lendersIt’s not difficult to look like a good lending prospect – you just have to show that you’re financially responsible and that your business is in good shape. High street banks will want to make sure you meet certain criteria from the get-go. They usually assess:
- The company’s credit history and the credit scores of its directors
- The business’s turnover (£100,000 or more is preferred)
- Transaction history and historic profitability
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