Debt Financing

One of the most common ways we could fund our company is through debt. 0:00 Debt financing is the most common way to bring in extra cash by borrowing someone 0:04 else's money. 0:08 The key term here is borrowing. 0:10 We're promising to pay the lender back. 0:11 We're going to talk about equity financing in a bit, and 0:14 as you will see with equity financing, you don't have to pay back any of the money. 0:17 Free money. 0:21 So why would we ever borrow money then? 0:22 Well, debt financing is much easier to secure than equity financing, and 0:26 much less complicated. 0:30 There are different types of debt out there, 0:31 but on average the time it takes to obtain debt financing is far shorter than equity. 0:34 One of the biggest advantages of debt financing is that you're not 0:40 giving away ownership of the company. 0:43 Since you're paying the money back, 0:45 you don't have to give a portion of your company away. 0:47 Because debt is easier to obtain than equity, the cost of doing so 0:50 is much cheaper as well. 0:53 When raising equity funding, you're going to have to pay lawyers to 0:55 prepare all your documentation for you, and that can add up. 0:59 Finally, the cost of the money is easily measurable with debt. 1:02 When you secure debt financing, the cost of doing so 1:06 is the principle plus the interest that you have to pay back. 1:09 With equity funding, you're giving away control of the company to someone else. 1:12 The immediate effects of such actions aren't measurable. 1:16 Will that come back to hurt you in the future? 1:20 Who knows. 1:22 Still a debt isn't all good. 1:23 There's some negative aspects to obtaining debt financing. 1:25 Let's see what they are. 1:29 First, you have to pay that money back. 1:30 That's a big one and the most obvious hurdle. 1:33 You have an obligation to pay that money back in a timely manner, so 1:35 you have to make sure that whatever you pay your money on brings in extra revenue. 1:39 Having debt on your balance sheet isn't attractive. 1:45 Investors don't like it because it means you owe someone money, and 1:47 other lenders don't like it because if they give you money, there is a lower 1:51 chance they'll get it back, because you're already paying somebody else off. 1:54 If you are a small business, just starting out with not a lot of revenue, 1:58 a lot of banks asset the founder personally guaranteeing the debt, 2:02 and possibly pledge collateral. 2:06 Finally, you might have to provide detailed accounting records as well as 2:08 quarterly or annual financial statements to the lender in order to qualify. 2:12 At the end of the day, debt is not bad. 2:16 That extra cash might be all you need to get to the next level of your business. 2:19 The key, as in your personal life, is to handle debt with care and 2:23 never take on too much debt. 2:27 Now that you understand the good and bad, let's take a look at different types of 2:29 debt financing we can obtain to grow our business. 2:33 There are many sources of debt financing out there. 2:36 Let's go over some of the more common ones available to entrepreneurs. 2:39 The most common kind of debt financing that pops into everyone's head, 2:42 is a bank loan. 2:46 To obtain a bank loan for 2:48 a new business, you'll need to show a business plan or a loan proposal. 2:49 If you don't know how to write a business plan, 2:53 check out the How to Write a Business Plan course. 2:55 We basically take all the information we learned in the discovery phase, and 2:58 convert it into a traditional business plan. 3:02 In your business plan, the bank will want to know the nature of the business, 3:05 the amount of money you want from them, how you intend to spend this money and 3:09 most importantly, how you intend to pay them back. 3:13 When attempting to get a bank loan, it will help if you have a good 3:17 history with the bank you're obtaining the loan from. 3:20 If they already know you're creditworthy, 3:23 securing the loan shouldn't pose a problem. 3:25 It also helps if you have a history of running a profitable business. 3:28 Financial statements, and projections can help you greatly here. 3:32 The only snag is that when you start up a business and don't really have a track 3:36 record to prove yourself, the bank will probably ask you to guarantee the loan. 3:40 If this does occur, check if the bank will agree to 3:45 remove the guarantee after a reasonable amount of time. 3:48 Most banks also won't give you a loan unless you have revenue history for 3:51 at least one year. 3:54 Now not all banks are made equal, so shop around for good rates when you're looking. 3:56 Explore the different types of loans to make sure you get something that fits your 4:01 needs as well. 4:05 Instead of getting an installment loan, 4:06 which is a large sum of money that you would pay off, 4:08 you could get a line of credit that allows you to draw funds when you need it. 4:10 Finally, it's also important to remember that not all institutions are equal. 4:15 Large banks have a variety of products, and 4:20 it might be easier to find something that works for you. 4:22 But smaller community banks are more willing to work with you and 4:25 customize their products to fit your needs. 4:28 So, in summary, how to get a bank loan. 4:31 You start by putting together a business plan or a loan proposal. 4:33 You prepare financial statements and 4:37 projections that clearly show your ability to pay back the loan. 4:39 You present the information to the lender. 4:43 You can also reach out to your government for money. 4:46 Across the world there are different government agencies that 4:49 provide support to entrepreneurs either through loans, grants or other benefits. 4:52 This really varies on your country and 4:57 even city, so make sure you look into what options you have available to you. 4:58 While I can't go into detail about every country, I've provided plenty of 5:03 links below so you can check out what's available in your area. 5:06 The third instrument of debt that most people are familiar with is credit cards. 5:10 Quite a few entrepreneurs use credit cards to finance their businesses when they 5:15 first start out. 5:19 Just be careful though, because credit cards can be dangerous. 5:20 Treat the debt just as you would an installment loan. 5:24 Make frequent payments and get rid of it as soon as possible. 5:27 Do not accumulate that interest. 5:30 Like bank loans, not all credit cards are the same, so shop around for 5:33 rates that you can afford. 5:36 More importantly, establish strict guidelines for 5:38 yourself if you plan on using credit cards, and 5:41 keep detailed financial records of all the purchases you make. 5:44 A good rule of thumb is to never put a non-revenue generating purchase on 5:48 a credit card if you can afford to. 5:52 So use it for long-term asset purchases that will help generate revenue over time, 5:55 or for something that will help bring in money quickly like inventory. 5:59 Now those are some of the more popular types of debt instruments. 6:03 There are more out there, but 6:06 they're somewhat outside the mainstream tools that you would use. 6:07 These things include home equity lines, 6:11 retirement funds, and life insurance borrowing. 6:12 You can use those types of debt, but they're far riskier. 6:15 You could lose the asset backing the debt if your business can't pay that 6:18 money back. 6:22 Debt financing can give you the leverage you need 6:23 to build your company into something much bigger. 6:25 You can hire more people, grow faster and achieve your goals quicker. 6:28 But debt can also be very dangerous, so tread carefully and 6:32 be realistic about how much of it you can take on. 6:36