Accessing financing opportunities is one of the most challenging tasks facing start-ups and small businesses today. Even though there is a growing market of financing entities, accessing funding remains a challenge as businesses are met with stringent terms which at times prove unfavourable to their growth and sustainability.

There are a number of avenues available for financing. These may be categorized into debt and equity  financing. Borrowing monies for repayment at a later date is referred to as debt financing, whilst equity  financing is funding provided in exchange for partial ownership in a business. The business operator  need to ascertain what type of funding is needed by assessing its stage of development and capital needs. Start-up businesses may find it more difficult to borrow money because there are no assets to serve as security, no track record as to its profitability, and more so, no positive cash flow. Hence a combination of debt and equity financing may prove more beneficial. Despite the type of financing chosen, the true test comes from securing the funding. It is therefore critical that careful planning is done to start the process. The most useful approach to planning is having a formal business plan prepared. This will serve to chart the direction of the business, whilst serving as a tool for gauging its performance. 

Debt Financing

Before a decision can be made as to appropriate source of funding, it would become necessary that an evaluation of the advantages and disadvantages is done. 

Advantages of Debt Financing:

• A primary advantage of debt financing is that the founder retains control of the business. In that, the decision making lies solely with the owner. 
• Debt financing gives small business owners more financial freedom. In that, debt obligations are limited to the loan repayment period. The lender’s claim on the business end after repaying the loan. As for equity investors, the claim on the business ends when the stocks are sold. 
• A debt that is paid on time can increase a small business's credit rating thus making it easier to obtain future loans.
• Debt financing is also easy to administer, as it does not require complex reporting as equity financing.
• Debt financing tends to be less expensive for small businesses over the long term, though more expensive over the short term, than equity financing.

Disadvantages of Debt Financing:

• Regular monthly payments of principal and interest are required. However, young companies may find it difficult to meet these obligations because of cash flow constraints.
• Borrowers are met with severe penalties for late or missed payments, which may range from late fees, possession of security, or early recall of loan. This could affect a business’s credit rating and consequently its ability to obtain future financing.
• Since lenders require security for funding, it may become difficult for younger companies to obtain same. The amount of money small businesses may be able to access via debt financing is likely to be limited, so they may need to use other sources of financing as well.

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