Title: Debt Financing Definition - Entrepreneur Small Business Encyclopedia
Headings: Debt Financing
Debt Financing
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Content: Make sure to check with your attorney before accepting any loans from friends or family. One of the most popular avenues of obtaining startup capital is credit cards. Although most charge high interest rates, credit cards provide a way to get several thousand dollars quickly without the hassle of paperwork, as long as you don't overextend your ability to pay back the money in a timely fashion. Interest payments on credit-card debt adds up quickly. If you have three credit cards with a credit line of $5,000 on each card and you want to start a small business that you think will require approximately $8,000, you could take a cash advance on each card and start that business. Within six months, if you build up a profitable business and approach your local bank for a $10,000 loan at about 10 percent interest, you could use this money to pay off your credit-card balances (which most likely have 18-percent annual rates). After another six months, you could pay off the bank loan of $10,000. A small-business loan usually costs a little more than a loan at the regular prime rate, which is the rate that banks charge their most favored customers. Small businesses usually pay one to three percentage points above that prime rate. Most small-business owners are more concerned with finding the right loan at the right terms than with the current interest rate.