Debt Financing
Money you borrow to run your business. You must repay borrowed money in full, usually in installments, with interest. A lender incurs risk and charges a corresponding rate of interest based on that risk. The lender usually assesses a variety of factors such as the strength of your business plan, management capabilities, financing, and your past personal credit history, to evaluate your company’s chances of success.
What is collateral?
Providers of debt financing often require collateral in the form of personal or business assets to secure the loan, often referred to as security. An asset is simply anything of measurable value, like equipment, facilities, real estate, savings, investments and your house.
Demand/Short-term loan
A demand loan is usually a short-term loan that carries a floating rate of interest (it varies according to the prime rate). Business owners use short-term loans to cover cash-flow shortages, to purchase inventory, or to take advantage of supplier discounts. The loans are usually repaid within 30 to 180 days.
Line of credit
Also called an operating loan, a line of credit provides a business with money to cover day-to-day expenses. As funds are used, the established credit line is reduced. Your line of credit is replenished when you make payments towards it.
Credit cards
A type of short-term operating loan, they allow you to make relatively small purchases today and pay for them later. As long as you pay off your credit card every month, you pay no interest on the loan.
Business term loan
It provides medium to long-term financing to cover some or all of the cost of capital equipment, expansion, or renovation of buildings. Term loans are usually secured by the asset being financed, and they come with different repayment schedules, interest rates and periods, depending on the purpose of the loan.