It sounds completely counter intuitive to say it, but yet it is good for a company to have debt. Regardless of whether the company is a multi-national conglomerate or a local start-up, having a certain level of debt is a good indication of future growth prospects.

Why is this so? To understand the seldom talked about aspects of debt, we need to first understand what debt is.

What is Debt?

According to Investopia, debt can be defined as a sum of money borrowed by one party from another party. Typically, debt is used by individuals or companies to make large purchases or fund operations that they are unable to afford under normal circumstances.

In return, the borrowing party has to pay back the sum at a later date, usually with extra interest. This interest is a form of compensation for the lender taking the risk of extending the loan while also serving as encouragement for the borrower to pay back the loan as soon as possible.

Debt Financing Helps Small Businesses Fuel Growth

All businesses need capital to maintain operations, and continuous inflow is required for growth. Debt financing allows businesses to get a quick injection to their liquidity in exchange for a promise to repay the principal sum plus interest.

Unfortunately for small businesses without the means of providing collateral for a secured bank loan or who don’t have sufficient credit rating, getting debt financing can be challenging.

One solution would be to get a SME Micro Loan from a licensed moneylender. In this case, provided that you demonstrate the ability to make good on repayment, you should be able to secure a loan in relatively fast time.

Debt leveraging business growth

Equity Financing, The Alternative For Raising Capital

If you have ever seen an episode of the popular TV series “Shark Tank” then you would be familiar with equity financing. In layman terms, when you choose to raise capital via equity, you essentially sell of a portion of your company to get capital financing.

Typically, investors come in form of larger companies looking to do a merger or acquisition, venture capitalists or angle investors. As such, equity financing is only available to companies that are deemed by investors to be worth acquiring.

A desirable aspect of equity financing lies in that it is the investor who takes up the risk. For example, should your business venture fail, you would not owe money to the investor. Additionally, since no repayment is required, your company will have a relatively better cash flow.

Why Debt Financing Should Be The Preferred Form of Raising Capital

Debt financing is popular with some of the most successful business people in the world. Perhaps, its biggest advocate is billionaire Kevin O’Leary who famously turned a $10,000 loan into a $4 billion sale of his business.

The biggest advantage that debt financing offers is that it allows you to retain total control of your business. When you raise capital through equity, your investors get to profit from all future business activities. This includes any potential future sale of the company; in this situation, you would not be earning the full valuation.

Another possible downside is the onboarding of your investors as partners. Since they own a percentage of your company, they are entitled to having a say in all major business decisions. Should you find difficulty in reaching a compromise with them, you will likely be forced to buy them out but at a higher price.

Financial Leveraging Using Debt

Financial leverage involves borrowing a sum of money for an activity that will return profits a higher rate than the interest owed to the loan. When successful, the borrower is said to have achieve a good Return On Investment (ROI) on the loan.

For example, you may have a client who wants to purchase 100,000 units of your product. Unfortunately, as your business is still young, your supply chain may only afford a production of 600,000 units. How then can you still make use of the opportunity? The answer lies in getting a business loan to improve your setup. Provided that the profit of the deal is more so than the interest owed, you would have made money on an opportunity that was not possible without the loan.

Loan to meet demand

Meeting Peaks in Demand

Another application of financial leveraging lies in the enhanced capability to meet seasonal peaks In demand. For businesses keen to make full use of holiday or event based demand, fast business loans online could allow them to rapidly increase their capacity.

A good example is that of florists who see a big upswing in demand in February due to Valentine’s day. By forecasting the demand that will arise from this predictable trend, floral businesses can borrow money first to get inventory needed.

When Equity Financing Makes Sense

In a final reference to “Shark Tank”, equity financing does make more sense in certain cases. Most prominently, when the investor in question has an expertise that will hugely benefit your business. When an investor has certain connections or know how to grow your business, they would be highly committed to improving your bottom line if they have something at stake. In this case, their earnings are tied to your business profits, thus you can rest assure that they will be positively involved.

Trusted SME Micro Loan

What to Look Out For When Attaining A Business Loan?

It goes without saying that not all business loans are equal. Lenders will include their own set of terms that allows them to make a profit from the loan while limiting the risk of default. As such a good lender will:

  • Understand your business and its core competencies or competitive advantages
  • Understand the logic of the loan for both sides
  • Lend you the money at an affordable rate that allows you to make repayment on time
  • Provide a hassle free experience which in turn allows for a quick release of the cash to your business.

Trust Tradition Credit For Your Business Loan

Tradition Credit is a licensed moneylender in Singapore with more than two decades of experience in the industry. We offer a comprehensive suite of financing solutions that are secure and fast. All loans are transparent with no hidden fees or penalties for early repayment. Trust our business loans to help your venture reach the next stage of its growth.