How Debt Financing Works

Debt financing is a way for companies to gain working capital in order to fund their businesses by borrowing money from a bank or online creditor to be paid with interest to the creditor.

Advantages and Disadvantages of Debt Financing

The advantage of debt financing is that businesses increase their cash flow in order to procure inventory. 

The disadvantage to debt financing is that you are required to pay back the loan with a predetermined amount of interest. The interest will compound monthly and the borrower can end up paying back more than the original loan amount just in interest.

Debt Financing Options

Options for debt financing include traditional bank loans, credit card financing, and government bonds, government-insured small business loans (SBA) loans, or family and friend loans.

Friendly Loan

A friendly loan refers to the mutual agreement between two parties, usually between friends or family members.

How a Friendly Loan Works

These loans are drafted to ensure the terms of the loan agreement, but are rarely documented, legally reviewed, or notarized. Typically, friendly loans are verbal in nature – such as a “handshake deal” where the parties’ word is their signature.