Is Debtor Financing a Good Idea? Here’s Why You Should Consider It

Let’s face it. Debt is a scary thing. Especially if you’re in business and about to become a client of mine for the final time. The last thing you want to do is take on more debt. After all, it feels like one more nail in your business coffin. But at the same time, anything that makes your company less vulnerable to oncoming debt is a good thing as well. If you look close, most businesses are going through at least one financial crisis right now. If you ask anyone with even the slightest bit of experience in finances, they’ll tell you that debtor finance is one of the top three reasons companies fail — next to undercapitalization and overspending, delusional forecasts, or an unsupportive board of directors. Here are a few good reasons why debtor-financed business loans are a great thing:

Debtor-Financed Loans Are The Right Financial Policy For Your Business

Credit unions, banks, and other traditional lenders are generally more than happy to approve loans that small businesses can qualify for. But there’s one catch — those loans usually have a higher interest rate and require you to pay them back with interest. Debtor finance, on the other hand, is generally cheaper and has no interest rate attached. The main difference is that you don’t have access to the same amount of financing. If you need more money and can’t get it from a traditional source, a debtor-financed loan is probably the perfect solution.

Debtor-Financed Loans Are Easy To Apply For

If you’re a small business and you have at least $500,000 in annual revenue, you can probably qualify for a traditional loan. But what if you have less than $500,000 in annual revenue? Well, the good news is that most banks and credit unions won’t make loans to small businesses without at least $500,000 in annual revenue. That means even if you don’t make a profit yet, you’re probably already too close to the edge financially to qualify for a conventional loan. That means if you have a valid business plan and are able to secure at least $500,000 in the financing, the bank or credit union will likely give you the loan. But if you prefer, you can also apply online at Bankrate.com or by filling out an online form.

Debt Kills Business Strategy

One of the main reasons debt is a bad thing for a business is because it makes you less flexible. When you have debt, you have less money to play with when it comes time to expand, buy new equipment, or lower your expenses. And while debt has its place in the business world, it has to be managed wisely. When you have debt, your business is just not as flexible. You may have to put more effort into coming up with new products or marketing them. That means you have less time and energy for growing your business. And without additional income, your company is likely going to flounder.

Debt Is The New Normal For Small Businesses

One of the major problems that small businesses face is that they don’t have the capital to buy the necessary inventory to support a growing business. As more small business owners are able to upgrade to the new, debtor finance may allow them to become more competitive in the market. That alone could help lead to more sales and profits for many small businesses. But small businesses that go into debt do so at a much higher risk of failure. You have to keep in mind that no matter what kind of loan your business applies for, it will come with an interest rate. As soon as that comes out of your pocket, you’re actually funding the company’s debt at the same time. And that’s not something you want to do for the long term.

Conclusion
Debt is a scary thing for any business to get involved with. The last thing you want to do is take on more debt. After all, it feels like one more nail in your business coffin. But at the same time, anything that makes your company less vulnerable to oncoming debt is a good thing as well. So, while debt is bad and will kill your business, debtor-financed loans are a great thing!