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Borrowing Money: Debt
Debt doesn't have to be a four-letter word. Borrowing money is
a natural, time-honored tradition for financing businesses. And
most larger companies have some kind of debt throughout the life
of their business.
New or young businesses (less than 2 years old or profitable for
less than 2 years) will usually have better luck getting loans from
private sources, such as friends and family or other personal sources.
Generally, these young or not-yet-profitable companies will have
a hard, if not impossible, time getting loans from institutional
sources, such as banks. Some banks or lending institutions may allow
you to put up collateral such as the equity in your home against
a business loan for a new company, but many want the business itself,
not other assets, to be able to support the debt it incurs.
Young and recently-profitable businesses can consider SBA-guaranteed
loans as a possible source of capital.
More established, profitable businesses will have an easier time
with institutional lenders such as banks. These businesses can turn
to lenders not only to expand their companies or to purchase equipment,
but also to finance operating capital to even out cash flow.
Short-term debt -- the kind provided by a line
of credit or loans from family
or friends -- typically is used for working capital and buying
the first round of production equipment. Turn to long-term debt
-- available from banks directly or through an SBA-guaranteed loan
-- for major business expansion or when you need to buy expensive
equipment or property that may, in turn, be collateral for the loan
that purchases it.
While some people associate debt only with not having enough money,
keep in mind that borrowing money also enables you to leverage the
money you have, and the value of your equity can grow more quickly.
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