Question

Without plagiarizing please give your thoughts about my classmates post below;

The type of lending institution I chose was debt financing through local banks. This is the more traditional way of getting capital for small businesses and is a good option if you have great credit and other sources of income in order to repay the note. This option worked for me for my gourmet popcorn company because I was able to show them that I would use the credit to purchase equipment, inventory, packaging materials, and other necessities in order to get my business up and running. Once I had those things in place, I was able to start making a product and turning a profit to repay the loan. This however, may not be the best option for fayVen because fayVen is a service business and doesn’t have a physical product to sell. With fayVen I think my best option for getting capital would either be crowdfunding or equity investments. Hopefully, we will get to explore these other, less conventional means of acquiring capital later in class.

Back to debt capital… going to local banks to acquire either a small business loan or a credit card is designed to help people get a jump start on opening up a business. Banks do want to see that you have also used some of your own money for the business before they lend to you, they call this “skin in the game” meaning that they know that you’ve already invested your own money and will do your best to make sure the business succeeds - that way they will be able to recoup the money that they lend you also.

It also helps to have a great business plan to show how your business makes money and any financial documents that you already have laid out prior to requiring a loan; profit and loss, balance sheet, and possibly a breakeven analysis are all good to have before going to a bank and asking for a loan. Banks also want to see legal forms, to ensure that your business is legit. Some forms you might need to have are legal formation documents (LLC), the ownership document that shows who has how much percentage of the company, and your tax ID or EIN number document.

Depending on how much you need will dictate how in depth and precise your financial documents need to be. Debt financing is a great option - just be sure you are able to pay the note monthly and that the terms are reasonable.

Answer 1

I am in agreement with my classmates post. Debt financing from the local banks is an easy and convenient way to raise finance for the business. In every business it makes sense to invest one’s own capital and the remaining amount requirement both for starting the business and for expanding can be raised by way of debt financing from local banks. Debt financing has another advantage which has not been covered in the post. Debt financing requires interest payments which are tax-deductible and hence the use of debt reduces the cost of capital of the business. However the business must maintain a healthy debt equity ratio to ensure that it does not get overburdened by the debt which can threaten its very solvency.