Support from the Business Finance Guide on what businesses need to consider when taking on debt finance.
There are many factors to take into account when a business takes on debt. However, debt can be a good thing when it provides the business with added flexibility or supports future plans.
Consider the following before making any firm decisions
- Lenders will always take into account a potential borrower’s personal or business credit record when deciding whether or how much to lend.
- Loans are less flexible than overdrafts, and charges could be payable on funds not used.
- There may be penalties for early repayment of debt.
- Being locked into a rigid repayment schedule can prove problematic if cash flow is seasonal or erratic.
- Overdrafts are repayable on demand and so can be reduced or called in if the finance provider thinks that the business may be in difficulty.
- There are likely to be penalty charges for exceeding an overdraft limit.
- Security against the loan will almost always be required, as will personal guarantees from directors or owners.
- If a business is growing, the amount of asset-based finance will track the growth.
- Care should be taken when setting the repayment terms for a lease to ensure it is at least as long as the agreement. You can find out more from the Finance and Leasing Association.
- Interest rates in peer-to-peer (P2P) business lending are often set by the market on the platform and reflect the level of supply of business loans.
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