Kavan Choksi Gives Debt Financing Guidelines for Small Businesses
There are different ways for startups and small businesses to raise funds for starting a business and meet their operational expenses. Debt financing is one of the options where the businesses can borrow money from lenders, banks, or their friends and family to raise funds for raising capital, daily operations, business expansion, purchase of new equipment, or other expenses. They need to pay back this cash advance with adequate interest.
Another mode of financing is equity financing. In this financing mode, the business owners may share their business ownership with others to raise funds from them. At some point, debt financing may be ideal for fundraising, whereas it may be ideal to think of equity financing in some other cases. This article may discuss debt financing and how it works in favor of businesses. We will listen to a financial analyst expert by breaking down the elements of debt financing and the available options.
How does debt financing work? Kavan Choksi explains
As explained by Kavan Choksi here, debt financing comes in various forms. You need to be very careful about choosing the appropriate financing model in order to be safe and in control while borrowing money for the business. Here are three of the most popular models of debt financing explained.
Term loans for businesses
A term loan is the traditional form of loan, which can be secured or unsecured. This is the simplest mode of debt financing. By availing of terms loans from banks of other conventional lenders, you can get a fixed amount up front against any collateral. You have to repay the money with interest over the set period of the term.
Lines of credit
A line of credit or revolving loan is something that businesspeople can avail with a certain credit limit. Within this limit, you can take out funds as and when needed. The advantage is that you need not have to pay interest for the entire amount, but only for the money, you pulled from your available credit limit.
Cash flow loans
You can avail of the funds upfront based on your receivables in cash flow loans. In this model of debts, you do not have to pay back the money as in the case of other lines of credit. You may receive only the amount by deducing the cash advance and the lender fee as your revenue comes. Invoice financing is the most popular form of cash flow loan. There is a merchant cash advance and other forms of cash flow loans, too, which you can explore.
There are also more options in debt financing, which you can explore to fund your business. You may also approach your family and friends for emergency funds. The other lines of credit for small businesses include the government-backed loans for SMEs, equipment purchase loans, personal loans, etc.
Kavan Choksi suggests that you need to distinguish between short-term loans and long-term loans based on your need. Short terms loans may have a repayment period of one year or less, whereas long-term loans may have a longer period of 5 years or more.