Business debt financing has become a major source of providing cash resources to the business. Whether the entrepreneur wants to establish a new business or he wants to invest more to provide firmness to his existing business, Business debt financing plays a vital role. Business debt financing may be in the form of providing additional capital by the owner, lending from the bank or any financial institution or investment in the business by the third party.
Who Can Provide Finances?
Stability of any business depends on the amount of cash it has either in hand, at bank or in the shape of highly liquid assets such as short-term investments, bonds etc. In case of any financial crises generally there are three parties who can provide finances to any business which are discussed below briefly:
Equity Investment By The Owner:
The most appropriate and safe way of providing finances to the business is the capital investment made by the owner out of his personal savings.
Investment By Third Party:
Business can also get cash resources from the investment made by any third party into the business.
Long-term And Short-term Loan:
In case when the above two options are not available to the owner he is forced to take a loan from the bank or any other financial institution.
In case of small business debt financing is not an issue. The owner can use so many options instead of taking a loan or involve ant third party into the business. He can arrange cash resources from his personal savings and brought it into the business in the shape of capital. If this option is not available to then he can go for short-term loans.
Obtaining a long-term loan is also a reasonable option if the entity in interested in the purchase of any asset. But it may involve interest costs which may be a burden for small businesses.
Now in the modern world the use of credit cards has become a routine activity for small transactions. Small businesses can also get benefits from the use of credit cards instead of going for any other option.
As the size of business expands, the amount of debt accumulates more and more and business need large amount of cash to meet his financial demands. In this case the entity cannot survive without business debt financing. If the scale of the business is large then the best option available is to for a long term loan.
Lower monthly installments and low interest rates can help the entity to manage his overall financial requirements. The company can also use his assets as a collateral security against loans.
Use Of Credit Cards For Business Transactions:
Although the credit cards have so many benefits but it is not an advisable option. High interest expense is an alarming problem in usage of plastic money. The business cannot afford high financial costs. But it is still used by numerous entities for day to day transactions.