Debt management is an important step in managing your business, which is why you need to know about various types of debt. It’s expected that you will incur some form of business debt. Understand that not all debts are created equal. Your selected debt strategy can make-or-break your business efforts.
Learning about different types of debt is the first step to choosing the financial strategy that works best for your company. Then, you can use the money to your advantage: helping your business expand when the opportunity is right, or make it through a slow season.
Types of Business Debt
When you are applying for a business loan, your options always fall into these two categories:
- Secured Debt: When a loan is secured, it means that the debt is backed by an asset. This collateral gives the bank an alternative option for payment if you default on the loan. For example, you might use industrial equipment or property as the collateral for a secured loan.
- Unsecured Debt: This financing method gives you access to the funds without offering collateral. You are under a contractual agreement to pay the balance. If the account defaults, then the lender can take you to court to recover the funds.
The structure of your debt is determined by the loan the bank is willing to offer. It’s important to explore the many types of debt before locking into business debt.
Examples of Business Debt
While a bank loan is a common option for business owners, there are other ways you might access business debt. Common types of debt include:
- Supplier Debt: Borrowing money from vendors between the time the goods are received to when you pay the invoice.
- Bank Debt: Funding offered through a financial institution, such as a bank or credit card company.
- Credit Cards: Business credit cards work similarly to personal credit cards.
- Private Lender: Funds that come from a private entity or group of investors.
Choosing the Right Type of Debt
There are pros and cons to all types of debt. Secured debt typically has a lower interest rate and more favorable terms since the lender’s risk is reduced. On the other hand, you might not have assets for collateral, so unsecured loans might be your only option.
When it comes to deciding on the right type of debt needed for your business, look for the ways you can access the money while managing your cash flow at the same time. Not only do you need to evaluate current financial needs, but also have a strategy in place for the repayment of a loan. You will find a wide range of payment terms, including varying interest rates, through the different types of debt available for your business.