Are you familiar with pros and cons of Debt financing?
Are you really ready for acquiring debt loan?
Debt which refers to repay. A method of financing in which a company or a person receives a loan and promises to return back the same with interest in future.
Debt financing includes secured and unsecured loans.
Security involves a form of assurance that the loan will be debited. Most of the lenders will ask for some security on a loan. Here are some options for security that you can offer a lender:
- Guarantors are those who sign an agreement that the loan will be repaid.
- Endorsers are similar to guarantors except for being required.
- Co-makers who takes the responsibility of the debt.
- Equipment will have 60% to 65% as an assurance value for a loan
- Real estate, either commercial or private counts up to 90% value for a loan.
- A savings account or a certificate of deposit can also be provided to secure a loan.
- Insurance policies can count up to 95% of policy’s cash value.
- Warehouse inventory secures up to half of the loan value.
- A chattel mortgage is when equipment is used as collateral. The lender makes a loan which is less than the equipment current price value and holds a mortgage on it until the loan is repaid.
- Visual Merchandising like a car, furniture, electronics, and home equipment can be displayed as a form of security
- Lease payments can be assigned to the lender. If the lender you are contacting for a loan already has the mortgage on a property that you are trying to lease.
You can also acquire debt finance through unsecured loans in which credit reputation is the only security the lender will accept. You may get a good weight-age of loan value if you have a good relationship with the bank or a lender.
Most debt will have a repayment period. Here you go,
- Short term loans can be back within 18 months.
- Intermediate-term loans paid back within 3 years.
- Long-term loans are paid back in 5 years or less.
The common cause of debt financing for start-ups often is not through a commercial lender, but friends and family. When lending money from your relatives or friends, have your power of attorney draw up legal papers stating the terms of the loan.
Is it necessary to get the attorney for a loan from family and friends?
Because too many entrepreneurs lend bugs from family and friends on an informal basis. The conditions of the loan have been verbalized but not written down on a contractual basis.
In this scenario, if the lender does not feel the business is running in a right way as it should be then they might step in and question you in your operations. You will not be able to prevent this, even on a contract basis. Since state law guarantee voting rights to an individual who has invested to run a business. Ensure to check with your attorney before accepting the agreement.