Question

Describe a source of debt financing, and discuss when this type of financing would be appropriate for a small business.

Answer 1

Answer: Debt- It is a liability or the obligation that company has to pay. Company raises funds through sources of debt. There are many sources of debt, such as; loan, bonds, notes payable, trade credit etc.

Source of debt financing for small business- Are as following:

(1): Loan- It is taken from banks and other financial institutions. Loan is easy to take and very popular in small business. Company that takes loan, has to pay interest on it and it has to be repaid after a certain time.

(2): Trade credit- This is given by one company to other. It provides exchange of goods and service without immediate exchange of money. This takes place between firms and supplier, dealers, distributors etc.

(3): Asset based lenders- Business has to pledge its assets, such as account receivables, inventory and real estate when takes loan from Asset based financial companies.

(4): Family and friends- Small business owners can also take loan from their family members and friends at low rate of interest.