Debt financing is borrowing money to obtain an asset. Known as financial leverage, debt financing offers lenders a sense of security. You can use home equity or mortgage for debt financing. Most small business owners opt for debt financing against an asset and in this case, their home equity/mortgage.
Introducing Debt Financing
In 1999, the Bank of England published a paper called “Finance for Small Firms.” The paper stated that most small businesses receive financial aid through internal finance. You will have to repay the loan at an agreed interest rate— floating or fixed rate — and within a certain duration.
Since the loan is secured against an asset, your asset for debt financing will be your home mortgage. If you fail to repay the loan, the lender will claim your asset. Your asset can be your house, other properties, or even the equipment your business owns. Get council tax debt written off with an IVA, as an alternative to refinancing.
The Downside to Debt Financing
It will lock you into making payments on time, which for a small business, especially a start-up, may become problematic later. You will need to show the lender on how you will repay the money and provide them with security for a loan. If you cannot use your home equity/mortgage for debt financing, as the lender will require you to obtain debt financing against your personal assets, you will not be eligible for a loan.
The Upside to Debt Financing
With debt financing, you receive two benefits, the ability to borrow more money and possibly cheaper borrowing.
- The Ability to Borrow More — If you need to borrow over £25,000, using home equity/mortgage may be the right option for you. The amount of money you can borrow from the lender depends on your credit record, your income and existing borrowing, and the amount of equity you have in your home.
- The Ability to Borrow for Cheaper — In some cases, not all, it is possible to get a secured loan for cheaper. The lender will allow you to borrow for cheaper because they have collateral — your home equity — for the loan. This could also allow you to write off council tax debt.
*Tip: Check the cost of both secured personal loans and unsecured personal loans to decide which is the cheapest option for you.
What Are the Alternatives to Debt Financing?
If you do not want to borrow money against your home mortgage, you can opt for an unsecured home improvement loan, a social loan, or a credit card.
- Unsecured Home Improvement Loan — Some lenders allow you borrow a large amount If you use them to make improvements to your home. However, if you are using it to finance your business, this would not apply to you unless you run your business from home.
- Social Loan — Peer to peer loans offer low interest rates, as they charge less money to borrowers to borrow money.
- Credit Card — Use your credit card to borrow money.
If you think this option is feasible for you, you should consider opting for it.