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One of the most common ways we could fund
our company is through debt.

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Debt financing is the most common way to
bring in extra cash by borrowing someone

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else's money.

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The key term here is borrowing.

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We're promising to pay the lender back.

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We're going to talk about equity financing
in a bit, and

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as you will see with equity financing, you
don't have to pay back any of the money.

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Free money.

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So why would we ever borrow money then?

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Well, debt financing is much easier to
secure than equity financing, and

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much less complicated.

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There are different types of debt out
there,

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but on average the time it takes to obtain
debt financing is far shorter than equity.

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One of the biggest advantages of debt
financing is that you're not

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giving away ownership of the company.

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Since you're paying the money back,

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you don't have to give a portion of your
company away.

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Because debt is easier to obtain than
equity, the cost of doing so

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is much cheaper as well.

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When raising equity funding, you're going
to have to pay lawyers to

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prepare all your documentation for you,
and that can add up.

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Finally, the cost of the money is easily
measurable with debt.

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When you secure debt financing, the cost
of doing so

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is the principle plus the interest that
you have to pay back.

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With equity funding, you're giving away
control of the company to someone else.

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The immediate effects of such actions
aren't measurable.

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Will that come back to hurt you in the
future?

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Who knows.

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Still a debt isn't all good.

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There's some negative aspects to obtaining
debt financing.

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Let's see what they are.

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First, you have to pay that money back.

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That's a big one and the most obvious
hurdle.

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You have an obligation to pay that money
back in a timely manner, so

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you have to make sure that whatever you
pay your money on brings in extra revenue.

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Having debt on your balance sheet isn't
attractive.

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Investors don't like it because it means
you owe someone money, and

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other lenders don't like it because if
they give you money, there is a lower

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chance they'll get it back, because you're
already paying somebody else off.

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If you are a small business, just starting
out with not a lot of revenue,

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a lot of banks asset the founder
personally guaranteeing the debt,

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and possibly pledge collateral.

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Finally, you might have to provide
detailed accounting records as well as

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quarterly or annual financial statements
to the lender in order to qualify.

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At the end of the day, debt is not bad.

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That extra cash might be all you need to
get to the next level of your business.

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The key, as in your personal life, is to
handle debt with care and

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never take on too much debt.

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Now that you understand the good and bad,
let's take a look at different types of

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debt financing we can obtain to grow our
business.

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There are many sources of debt financing
out there.

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Let's go over some of the more common ones
available to entrepreneurs.

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The most common kind of debt financing
that pops into everyone's head,

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is a bank loan.

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To obtain a bank loan for

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a new business, you'll need to show a
business plan or a loan proposal.

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If you don't know how to write a business
plan,

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check out the How to Write a Business Plan
course.

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We basically take all the information we
learned in the discovery phase, and

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convert it into a traditional business
plan.

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In your business plan, the bank will want
to know the nature of the business,

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the amount of money you want from them,
how you intend to spend this money and

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most importantly, how you intend to pay
them back.

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When attempting to get a bank loan, it
will help if you have a good

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history with the bank you're obtaining the
loan from.

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If they already know you're creditworthy,

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securing the loan shouldn't pose a
problem.

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It also helps if you have a history of
running a profitable business.

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Financial statements, and projections can
help you greatly here.

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The only snag is that when you start up a
business and don't really have a track

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record to prove yourself, the bank will
probably ask you to guarantee the loan.

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If this does occur, check if the bank will
agree to

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remove the guarantee after a reasonable
amount of time.

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Most banks also won't give you a loan
unless you have revenue history for

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at least one year.

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Now not all banks are made equal, so shop
around for good rates when you're looking.

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Explore the different types of loans to
make sure you get something that fits your

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needs as well.

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Instead of getting an installment loan,

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which is a large sum of money that you
would pay off,

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you could get a line of credit that allows
you to draw funds when you need it.

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Finally, it's also important to remember
that not all institutions are equal.

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Large banks have a variety of products,
and

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it might be easier to find something that
works for you.

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But smaller community banks are more
willing to work with you and

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customize their products to fit your
needs.

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So, in summary, how to get a bank loan.

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You start by putting together a business
plan or a loan proposal.

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You prepare financial statements and

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projections that clearly show your ability
to pay back the loan.

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You present the information to the lender.

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You can also reach out to your government
for money.

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Across the world there are different
government agencies that

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provide support to entrepreneurs either
through loans, grants or other benefits.

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This really varies on your country and

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even city, so make sure you look into what
options you have available to you.

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While I can't go into detail about every
country, I've provided plenty of

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links below so you can check out what's
available in your area.

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The third instrument of debt that most
people are familiar with is credit cards.

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Quite a few entrepreneurs use credit cards
to finance their businesses when they

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first start out.

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Just be careful though, because credit
cards can be dangerous.

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Treat the debt just as you would an
installment loan.

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Make frequent payments and get rid of it
as soon as possible.

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Do not accumulate that interest.

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Like bank loans, not all credit cards are
the same, so shop around for

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rates that you can afford.

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More importantly, establish strict
guidelines for

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yourself if you plan on using credit
cards, and

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keep detailed financial records of all the
purchases you make.

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A good rule of thumb is to never put a
non-revenue generating purchase on

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a credit card if you can afford to.

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So use it for long-term asset purchases
that will help generate revenue over time,

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or for something that will help bring in
money quickly like inventory.

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Now those are some of the more popular
types of debt instruments.

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There are more out there, but

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they're somewhat outside the mainstream
tools that you would use.

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These things include home equity lines,

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retirement funds, and life insurance
borrowing.

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You can use those types of debt, but
they're far riskier.

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You could lose the asset backing the debt
if your business can't pay that

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money back.

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Debt financing can give you the leverage
you need

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to build your company into something much
bigger.

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You can hire more people, grow faster and
achieve your goals quicker.

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But debt can also be very dangerous, so
tread carefully and

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be realistic about how much of it you can
take on.