Credit unions can also be a good source for business loans. Large commercial banks will often have more experience in making business loans than small savings banks. If you want to avoid these sort of situations, it may be best to make formal arrangements with your family before any money changes hands.īanks are also a private source of debt financing. They are also more willing to invest their money into a business that may not be fully developed yet.Ī disadvantage is that friends and family may want to be more involved in the management or decision-making than a bank or investor may be. People that are close to you are much more likely to give flexible terms of repayment.

Small businesses can get debt financing from several different sources.Ī lot of startups borrow money from friends and family. They will either receive funds through the paying of dividends, or they can get their initial investment back by selling their shares in the company. With equity financing, you do not pay the lender back. This means that they may have a say in the operations of the company and will look for a future return on their investment. When you receive money through equity financing, you are giving up a small piece of your company to an investor. The stake in the company is given through common shares. Debt Financing Versus Equity Financingĭebt financing is a loan that must be repaid, while equity financing is an investment of money in exchange for a stake in the company. It's good to be aware of the fact that banks often shy away from small businesses that are experiencing rapid sales growth, a temporary decline or a seasonal slump. It can come from selling bonds, bills, or notes to lending institutions, or from private investors who are not looking to receive equity in your business. This is also known as borrowing on credit.

Debt financing is when a company raises money by taking out a loan and then repays that loan over time with interest.

Define finance debt