How to Secure Debt Financing: A Guide For Business Owners
Securing funding is a natural step for any business owner to take when looking to grow or develop their business. Among financing options is the choice to fund through debt financing. Debt financing is a popular option for business owners as it allows them to retain a hold of their equity while paying off any potential loan over a set timeline.
But how does a business owner secure debt financing? Backd is here to help walk you through the steps that you may have to take when applying for debt financing for your business.
What Is Debt Financing?
Debt financing is a method of raising capital for a business or organization by borrowing money from a lender or investor, with the agreement to repay the borrowed amount plus interest over a specific period of time. This can be in the form of bonds, loans, or other debt instruments.
In debt financing, the borrower (the company or organization) is legally obligated to repay the principal amount of the loan, along with interest and other fees, in line with the terms and conditions of the agreement. The lender, in turn, receives regular interest payments as well as the repayment of the principal at the end of the term.
Debt financing is often used by companies and organizations as a way to raise capital for various purposes, such as funding new projects, expanding operations, or refinancing existing debt. However, it also carries the risk of default if the borrower is unable to make the required payments, which can result in penalties, higher interest rates, and damage to the borrower’s credit rating.
Steps to Secure Debt Financing
1. Determine the Amount Needed
The first step of debt financing, or any sort of financing, should be to determine the amount that your business will actually need. When determining this, it may be helpful to determine a range with a set minimum and maximum amount to ensure that you do not withdraw more funding than you actually need or can afford.
Knowing the funding range that you are looking for will also help you when negotiating as, depending on your credit history and supporting documentation, your funding offer may vary from lender to lender.
2. Decide Which Type of Debt Financing Is Best
Now that you have determined the capital that you will need to acquire, it’s time to look for the source. But prior to finding a specific lender, you will need to decide which specific type of debt financing is best for your business. There is a multitude of options available, from government programs to banks and financial institutions.
Each option comes with its own benefits and limitations that will be different for every single business. It is crucial that you do a thorough investigation of the pros and cons associated with each before making a decision.
3. Research Lenders
Once you have made a decision on which type of debt financing is best for your business, there is one last phase of research that must be done; researching lenders. This is one of the most crucial stages in the decision-making process as you are deciding who you will be working with.
Compare multiple options and don’t be afraid to get on the phone with a company. Talking to a lender is a great way to investigate how communicative they are while also getting to know the company that you will be working with a little better. While researching, make sure you look for any red flags that may cause issues later down the line.
4. Gather Financial Information
Now that all of your research is complete and you have decided who you would like to apply for funding with, it’s time to gather any financial information that you may need for your application. Each lender has their own set of required documents that may vary slightly, although there may be some crossover in what you need to compile.
Check out our Essential Criteria for Securing Business Financing for a full list of any of the documentation that you may need to compile.
5. Prepare a Business Plan
While preparing a business plan may not be a requirement for every lender in order to secure funds, it is never a bad idea to have one on hand. Business plans help to outline what the funds are needed for as well as how the funds will be allocated throughout your enterprise. A business plan works as a great road map to keep you on track during, and even after, the funding process.
Business plans also work as a great reference point for answering any potential questions that a lender may have in regard to your business, your plans, or how you will use the funds.
6. Submit an Application
Now that you have completed all of the necessary preparations, you are ready to go through the application process and click submit. The time that it takes to complete this step will vary from lender to lender, however, many companies are now utilizing AI and other advancements in technology to make the application process as quick and efficient as possible.
For instance, applying through Backd takes as little as 3 minutes thanks to our automated process.
7. Review and Accept the Loan Terms
Once your application has been accepted and you receive your funding offer, it’s now time to review and accept the terms of your loan. This step is crucial and should not be rushed. Ensure that you know any fees and penalties associated with your loan, including if there are any penalties for making repayments early.
If you have questions before signing your funding agreement then reach out to your lender. They should be more than happy to answer any questions that you may have and this is also a great way to check on how responsive they are before you make an agreement.
8. Receive the Funds
The easiest step on this list! Once the loan terms have been accepted, your funds should be distributed to your account. You will then need to use the funds for the intended purpose and make regular payments in accordance with your loan agreement.
Debt Financing Made Simple With Backd
The steps that you take to secure financing may differ depending on who you work with. At Backd, we want to make the process as simple as possible, that’s why it only takes 3 minutes to apply for debt financing!
Whether you want a business line of credit or a working capital advance, Backd is here to help. Don’t wait to get the funds that your business needs, apply today and secure your debt financing.
