Running a business is a full-time job. Regardless of how much time and money you put into this, accumulating a business debt is sometimes inevitable due to several specific situations. Such as market instability and bad decisions made by management. Business loans get higher interest rates than personal loans, and this is one of the reasons why businesses accumulate such large amounts of debt.

Business debts are harder to pay because if a company stops operating because of financial problems, debt will start accumulating just the same, and the interest rates and payment periods will become longer.

Banks and financial companies will give indebted businesses a low credit rating making it more difficult for them to acquire credit or loans. This is why business debts are more difficult to repair than any other type of debt.

Stephen Baker is a current business client here at Commercial Debt Counseling and he is very interested in some issues about business debts that our professional counselor, James Banks will help explain.

Stephen Baker:

How can a business debt be financed?

James Banks:

Mainly, there are two types of business financing methods. Debt finance and equity finance. The former, debt finance, is the one that banks and financial companies offer you to help face the business debt. The most important benefit of debt financing is that it is limited and eventually, you will end up paying the whole sum down to zero. After that you will not have any further obligation with the lenders. The disadvantage of this type of financing is that the lender can, and will, take a very close look at your business taking into account income, costs, business' time in existence, and you will have to use assets as collateral for the loan. Debt finance will mean an extra monthly payment.

The latter, equity financing is the kind that you get from external investors. It is also called venture capital. You receive money in stocks in exchange of equity in your business. The most important benefit is that you will not have to make any monthly payments to the investors. They will receive ownership interests constantly. This kind of financing allows more freedom and less financial burden.

Stephen Baker:

So, what is the difference between a bank and an investor?

James Banks:

Conventional lenders such as banks take into account different characteristics than the investors with venture capitals. Banks always look for a zero risk investment, and they pay extra attention to the internal financial situation and do not really care about a future growth of the business itself. They are mainly interested in the cash flow and the assets required as a backup. The thing is that those two issues are the ones that most little businesses lack of. That is why business debts have become so common between these types of businesses.

Then again, venture capitalists take into consideration the opposite characteristics that banks do not. Such as possible future growth, management team and how decisions are made. Remember, no matter which financing style you choose they will always take a close look at your business. That is the main part to get rid of business debt.

Stephen Baker:

What is it that they look for?

James Banks:

Banks and venture capitalists, both, will take a good look at two specific documents:

1. Business plan

2. Bank or loan request

These documents well managed, can get you a good lender or can bring the opposite if not put together well. One recommendation we make to our business clients in order to avoid business debt and learn how to develop a plan, is to read a lot about new management ways or ask our professional counselors to receive advice in certain topics.

Stephen Baker:

What are the recommendations when looking for a deal?

James Banks:

Look into several contacts in private capital before developing a deal with any of them. This way you will see different contracts and several ideas. The contract should be first proof read by a professional and not just by you. Getting out of a business debt is not an easy task, but there are lots of possibilities to do it and with a well organized business plan you can move forward. The most popular types of contracts are: royalty financing contracts, preferred stock and short term mortgage loans that have a time-frame of three to four years.