The Valuable Thing You Won’t See On Shark Tank: Debt Financing

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The Valuable Thing You Won’t See On Shark Tank: Debt Financing

When you start to look at financing options for your company you’ll come across two options.

You’ll have to decide whether to go the route of debt or equity financing.

 

Equity financing is what we see on “Shark Tank.”

Entrepreneurs give up partial ownership of their companies in exchange for the necessary capital.

 

If you decide to pursue debt financing you’ll be able to keep full ownership of your company.

Instead of giving up equity, you’ll pay interest and principal payments.

 

We’re going to focus on debt financing today as this is a much more plausible situation for most.

We’ll go over the pros as well as the cons so you can figure out if it’s a good fit for you.

 

Cons

Debt financing will come from banks or other lenders who target low risk investments.

If your company is in the start-up phase it will be difficult to obtain this kind of financing.

 

You might think you have an idea for the next billionaire dollar product and who knows, you might.

But, you don’t have a proven revenue stream yet.

So in the bank’s eyes you’re a risky investment. 

There’s no guarantee that you’ll be able to pay the monthly interest attached to the funding.

That’ll be a major issue for the lender.

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A 20% chance that you’ll be able to repay the loan is not enough for the bank to take a chance on your start-up.

 

 

 

 

 

 

 

 

In order to extend lending options the bank will want to see your company’s financial history.

In most instances they’ll want to see all your documents from the previous 3 years.

This will allow the bank to determine how risky of an investment your business will be.

 

A healthy stream of revenue will always help you obtain debt financing from a bank.

But, a start-up will have a hard time getting any funding offers from these kinds of lenders.

 

Pros

A lot of entrepreneurs prefer debt financing because they do not want to give up any ownership.

It’s understandable why this would be an issue to a lot of business owners.

It’s difficult for a lot of people to have the influence of others in their company.

Which is going to be the case if you go the route of equity financing.

 

Debt financing lets entrepreneurs execute their vision and grow their companies.

They don’t have to take  into account the opinions of other owners.

 

There will never be any pressure for you to have a long term exit strategy.

So you can continue running your company as you see fit, for as long as you want.

If your company is acquired later on you won’t have to share the profits with any other owners.

 

 

Debt financing could save you lots of valuable time and energy in the long run.

Many people vastly underestimate the work it takes to get equity financing.

It’s a lengthy process that involves creating a thorough business plan and presentation.

Once those are perfected you need to pitch to the right investor.

Keep in mind that there’s already only a small chance that you’ll get a deal.

 

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Debt financing only gives you the capital necessary to take your company to the next level.

It allows you the opportunity to execute your own vision without the influence of others.