There are several advantages to financing your business through debt:
The lending institution has no control over how you run your company, and it has no ownership.
Once you pay back the loan, your relationship with the lender ends. That is especially important as your business becomes more valuable.
The interest you pay on debt financing is tax deductible as a business expense.2
The monthly payment, as well as the breakdown of the payments, is a known expense that can be accurately included in your forecasting models.
Disadvantages of Debt Financing
However, debt financing for your business does come with some downsides:
Adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, including the debt payment. For small or early-stage companies that is often far from certain.
Small business lending can be slowed substantially during recessions. In tougher times for the economy, it can be difficult to receive debt financing unless you are overwhelmingly qualified.
WARNING!! During economic downturns, it can be much harder for small businesses to qualify for debt financing.The U.S. Small Business Administration (SBA) works with certain banks to offer small business loans. A portion of the loan is guaranteed by the credit and full faith of the government of the United States. Designed to decrease the risk to lending institutions, these loans allow business owners who might not otherwise be qualified to receive debt financing. You can find more information about these and other SBA loans on the SBA’s website.