In part 2 of this 3 part series on funding your kingdom business we will explore debt funding.
Debt financing means that your business receives capital in the form of a loan which must be paid back with interest.
- Control – by borrowing money you are not giving up ownership in your business.
- Interest Rates – low interest rates may make borrowing a low cost of funding a business’s growth. The lower the interest rate the lower the need for higher rates of return.
- Growth – borrowing funds provides you with an opportunity to pursue a growth strategy for your business.
- Higher risk – borrowing money means you run the risk of not being able to repay it, and hence find yourself in default. This has potential legal consequences including bankruptcy.
- Cash flow – the repayments of the loan comes out of the business cash flow and in this respect have a negative impact.
- Loss of control – in the event you default you may lose control of your business to creditors or assets of the business subject to the terms of the loan.
- Limit growth – whilst you may borrow money to grow your business, the return on your investment needs to be greater than the cost of borrowing. If not it will be a drain on growth.
- Slavery – the bible warns that debt may lead to slavery. This applies as much to businesses as it does to us as individuals.
CAUTION: Christians really need to rethink their views towards debt and align them with the Bible. Many rush into debt, but find it is a long journey out of it – avoid it like the plague!
Types of Debt Financing
- Trade Credit: is the credit extended to you by a supplier where in effect you get to ‘buy now and pay later. Whilst it can be beneficial for a business it should be used with care. You should never buy anything that you don’t believe you will be able to repay.
- Bank Overdraft: is a short-term loan where the bank extends your business credit even if the account is zero. An overdraft allows you to continue withdrawing funds from your account even though there are no funds available.
- Personal Loans: a type of loan, often small, that can be ‘secured’ or ‘unsecured’. These loans also tend to be medium-term in nature from 3-7 years compared to mortgages.
- Hire Purchases & Leasing: These types of loans are often used on cars and equipment and are mostly medium-term in nature. They can be appropriate but need to be considered carefully in terms of their impact on the business cash flow.
- Mortgages: Banks may allow you to take a mortgage against assets of the business or against personal assets. This involves risk and will impact on the business cash flow. Mortgages are often for 30 years or more.
- Friends & Family: What is the quickest way to lose a friend? Lend them money. This story plays out over and over again. Borrowing money from friends or family may sound simple and easy, but it often leads to broken relationships.