Debt Financing

Debt, in the most general sense, means to borrow money from someone for your personal or professional use with a commitment of giving it back on the due date either with some or no level of interest as decided.

It is very commonly observed that new companies when ever start their business often go for debts in case of shortage of finance. As far as the sources of debt are concerned, it can be as many as you want. Some go straight to the banks without wasting their time in asking here and there. On the other hand, others prefer to get help from their friends and relatives first instead of approaching the bank straight away.

However, there is no doubt about the fact that the most famous source of debt financing is definitely the bank. However, there are a lot of private companies in the market as well which give debts to the needy organizations.

Therefore, selection of your debt financing source will entirely depend on your needs and demands. In case, you are looking for a huge amount to be borrowed then bank would be the best option as friends and relatives can only help you in a limited way. But one thing that you need to be careful about while choosing bank as your debt financing source would be to return it on the due date as your friends and relative might not create any major problem in case of late return of money however bank would certainly take legal actions in this regard.

While on one hand borrowing money for starting up a new business setup has many advantages such as it helps in maintaining ownership and so on. However, on the other side, it has certain drawbacks as well which are given below;

a. As written earlier as well, your utmost priority would be to return the money you borrowed on the due date no matter your business do well or not in the market. So in case your business fails, you will be bound to give the payments even if you again have to borrow it from some other source.

b. If you have borrowed money and invested it on your business without making a proper plan of whether your business will give you profit in the given time period or not then it can further create problems for you in the future.

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