Starting a business is always a challenge. A business is primarily run a significant number of employees, using resources to manufacture products and deliver its services. However, a business will not be able to operate without one of its main resources- money. A business’ main concern is its financial resources- where to get them and how to acquire them. For business tycoons, there are a lot of ways to acquire financing for their business, one of which is debt financing.

Debt financing is the act of borrowing money from an outside source with the assurance of paying back the principal along with an agreed amount of interest rate. This is type of financing is commonly used by a number of startup companies because of its several advantages such as short-term operating needs, long-term investments and expansion of projects.

One of the advantages of debt financing is keeping business ownership. Upon borrowing money from an investor or lender, the company is entitled to adhere to a contract for the payment period and transactions. After the contract is terminated and all the payments have been settled, the management of the company can continue to run its business without any outside interference.

Another advantage of debt financing is the tax deductions. Companies often adhere to this debt financing since the interest rate and the principal rate are classified as business expenses which can be deducted from the company’s income taxes. Tax deductions create less financing impact on the business and let the company save money for situations such as export factoring.

Limited capital, especially if they come from internal profits, is one of the major reasons why companies are not able to expand their projects. With debt financing, a company becomes open to expansion, export finance and market opportunities. Aside from that, the company can use debt financing to strategically make investments on activities and plan a payment schedule without disrupting the company’s operations.

Although debt financing can be beneficial such as in export factoring, a company must be careful when adhering to this type of loan. For instance, if the business fails and the company goes bankrupt, it is still entitled to make repayments to the lender due to their agreement. The company can also be faced with high interest rates that vary with macroeconomic conditions.