Instead of raising money from investors in exchange for a portion of the company’s future profits through equity financing, debt financing refers to the practice of raising money through borrowing money to run your business. Institutions like Power Credit, which is good at money lending in Tanjong Pagar, can offer assistance in debt financing for your business. You have the option of obtaining either a long-term or a short-term loan, and this decision will determine which category of debt financing best suits your needs.
The Financing of Debt Over a Prolonged Period of Time
Long-term debt financing typically relates to the acquisition of fixed assets by your company, such as machinery, buildings, land, or other types of equipment. Lenders typically stipulate as a condition for granting long-term loans that the money borrowed be collateralized by the assets that will be used to make the acquisition.
When using long-term debt financing, it is common practice to schedule the loan’s payback over a period of three to seven years, which corresponds to the projected amount of time the assets will be put to use. The majority of the time, long-term debt will have set interest rates, which will translate into regular monthly payments and a high degree of predictability.
Debt Financing on a Short-Term Basis
Short-term debt financing is typically used for money that is required for the day-to-day activities of the firm, such as acquiring goods or supplies or paying the wages of personnel. Businesses that have a tendency to experience brief cash flow challenges, such as when total revenue is not enough to cover monthly expenses, frequently turn to short-term borrowing in order to meet their financing needs. Cash flow management issues can be especially difficult to solve for newly established organizations.
Why debt financing is a popular choice?
One of the advantages of having access to cash is that it enables one to acquire the funding that is necessary to expand their business in a method that is not unduly complicated. The process of acquiring funding through debt is often far less complicated than equity financing. This is because there is less adherence involved, and you also do not need to go through the way of testing equity partners or the manufactured procedure of bargaining and getting to an ownership agreement. This is because there is less of a requirement to comply with regulations. Both of these procedures can be challenging and time-consuming in their own right.