Debt financing involves borrowing money, typically from a bank or a company like Funding Circle, with the promise to pay it back at a certain interest rate over a certain period of time. The relationship you have with a financial institution that lends you money will be very different from the relationship you have with an investor – and typically doesn’t require you to give up equity in or control of your business. But, it’s important to partner with a lender who has your best interests at heart. Here are seven things to consider as you’re researching debt financing options.
1. What type of loan products are out there: This video provides a good overview of the variety of loan options available to businesses and the key factors lenders look for when evaluating your creditworthiness.
2. When to get a loan: Whether you want to jump on an unexpected opportunity or fill a short-term funding gap, here’s how to decide when the right time is to apply for a business loan?
3. Loan marketplaces: The lending landscape has changed dramatically in recent years, and over the past decade in particular banks have largely pulled out of lending to Main Street. To fill the financing gap, online loan marketplaces like Funding Circle have emerged using innovative technology, alternative data and fresh credit models to offer fast and fair financing to small businesses looking for capital to grow. Here’s the low-down on marketplace lending, and why it’s good for small business.
4. Loan rates: Interest rates vary considerably between lenders and depend on an array of factors from the type of financing and term to the creditworthiness of the borrower. How is a loan rate calculated, and how do you evaluate an offer?
5. Loan terms: What is a loan term and what sort of time frame should you expect from different lenders?
6. Lines of credit vs. loans: Different business needs and opportunities call for different types of financing. Learn the fundamental differences between a line of credit and a term loan to determine which is better suited for your business?
7. Credit cards: Revolving credit cards may seem like the most convenient way to pay your business expenses and fund your growth, but credit cards aren’t always a one-size-fits-all solution. Learn how to carefully weigh the benefits and the potential pitfalls of funding your business with plastic.
Whether your business has been in your family for generations, or you’re a young entrepreneur just starting out, it’s important to take stock of all the loan options available to you. In addition to debt and equity financing, you can also carefully consider tapping into your personal savings to give your business a kick-start. To learn more, head on over to the next part of our series, Tips for bootstrapping.