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As you can easily imagine, the business lending marketplace is full of terms. One of the most common and sometimes the most confusing is debt financing.
Working capital loans are simply short term loans that provide working capital for short term expenses.
What is Debt Financing?
Let’s start by explaining what debt financing isn’t, since this is typically where the confusion and misunderstanding stems. Contrary to what the label implies, debt financing doesn’t necessarily involve “selling debt” for cash.
Of course, a business could sell its debt if it desired. For example, purchase order financing involves transferring an account’s receivable to a lender in return for cash (usually around 80% of the amount due). However, to get back to the main point that matters: debt financing doesn’t necessarily – or often – involve selling debt.
And so, with that being said, we can focus on what debt financing is. Simply put, it’s the standard process of borrowing money from a lender, and promising to pay back the principal and interest in an agreed-upon way, for an agreed-upon time. A conventional bank loan, a working capital loan, a merchant cash advance, and a credit card are all examples of debt financing.
Now, would it make more sense if this were called “financing debt” instead of “debt financing”? Yes indeed, because that’s what is really happening (i.e. a business is financing its debt, not the other way around). However, decades ago the term “debt financing” entered the lending vocabulary, and it’s here to stay. So if you find this a little confusing as you mull over your business loan options, just remember: debt financing = financing debt.
The Pros & Cons of Debt Financing
As you can imagine, the pros and cons of debt financing are fundamentally the pros and cons of a business loan: you get cash-on-hand that you otherwise wouldn’t have (PRO), but you have to pay back principal plus interest that is greater than the amount borrowed (CON). Understanding this is the easy part.
The more complex part is, as noted above, there are many different kinds of debt financing products, and each one has its own pros and cons. To list and evaluate all of the options would turn this blog post into a book, and you’d need to send out for pizza because you’d be reading for the next several hours or days.
Since that’s not in the cards (you can thank us later!), we can instead focus on the pros and cons of a conventional bank loan, and then the pros and cons of a working capital loan.
Conventional Bank Loan: Pros
- Typically a lower interest rate compared to other debt financing options.
Conventional Bank Loan: Cons
- Low application approval rates due to high credit rating threshold and credit history requirements (usually 2+ years).
- A long application process that can take anywhere from a few months to over half a year.
- A past bankruptcy will likely lead to an application being rejected.
- The application itself is comprehensive and typically involves dozens of documents.
- Collateral is typically a must – without assets to secure the loan, it won’t be approved.
- Early pre-payment may trigger penalties.
- The loan can be called in at anytime if the bank has concerns.
- Loan proceeds typically must be used for the purpose(s) detailed in the application.
- The loan is paid back in fixed, large amounts each month.
Working Capital Loan Through Mulligan Funding: Pros
- Flawless/good credit isn’t mandatory.
- A past bankruptcy (provide it is discharged at the time of application) will typically not block an application.
- Application is seamless, online, and typically takes 10-15 minutes.
- Rapid evaluation process (48 hours or less). A decision on your application can be made in as soon as a few hours with funds available the business day after approval.*
- Loan proceeds can be used for any business purpose.1
- No collateral required.
- Early pre-payment is an option to save interest.
- A second loan can be applied for/received while the first is active.2
- The loan is automatically paid back in fixed, small amounts each day or week, depending on your loan agreement.
Working Capital Loan Through Mulligan Funding: Cons
- Working capital loans typically have a higher rate than bank loans, but if leveraged properly, they can generate ROI by allowing you to expand or increase your business capacity.
The Bottom Line
We hope that the information above has helped you understand what debt financing is and isn’t, and obtain a better sense of the pros and cons of bank loans and working capital loans.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!
The information shared is intended to be used for informational purposes only and you should independently research and verify.
Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.