Different Types of Debt Financing

When incorporating, one of the major decisions is how to finance your business venture.  There are two major options for financing: debt financing and equity ownership. Even when deciding to debt finance, there are other decisions to be made as there many options for debt financing. It is important to consider all options available to finance your corporation.

Debt financing means taking out loans on behalf of the firm or corporation.  The most common type of debt financing is a bank loan. The interest rates may vary by financing institution. You must do your research prior to deciding on what loan to take out.

The next type of debt financing is bond issues.  The first type of bond issue is the traditional bond.  A bond is a debt investment in which an investor loans money to your corporation, which borrows the funds for a defined period of time at a variable or fixed interest rate.  Another type of bond issue is the debenture.  A debenture is an unsecured loan certificate issued by a company, backed by general credit rather than by specific assets.  Historically, a third type of common bond issue is the bearer bond.  The bearer bond stated that whoever held the bond was owed the money.  However, it was outlawed due to how easy it was to utilize for tax evasion.

It is important to consider all of your options in deciding how to finance your corporation. Attempting to acquire future financing will be impacted by your previous financing. For example, banks look to the leverage of your corporation.  Leverage refers to the amount of debt in the firm or corporation.  If your corporation is highly leveraged, that means your corporation has a high debt to equity ratio.  Banks may be more wary of financing highly leveraged corporations.

In sum, consider all of your options regarding how to finance your corporation.  There are many options available with regards to both debt financing and equity financing. Understand all of the benefits and detriments of both types of financing.  Consulting with an experienced legal team can help you truly understand the implications of all types of financing.  Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.

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