Other types of debt finance that are increasingly popular include leasing, a way of borrowing to buy specific equipment or machinery, or factoring and invoice discounting, where the small business borrows against sales.
In fact there is a vast range of different debt financing tools and each business should find the one that is right for them.
If your business needs some working capital but the amount fluctuates, an overdraft is probably best for you. The interest rate is agreed in advance and you only pay interest for the time and amount that you are overdrawn. Businesses that need longer-term finance, in particular for a specific purchase or planned expenditure, should look to take a loan that can be repaid over a set period.
There are many reasons why debt finance could suit your business – it is accessible, flexible and tailored. Debt finance will be the first option for most small businesses. With debt finance, whether it is loans, overdrafts, leasing or invoice discounting, the company is borrowing against reserves rather than giving someone ownership of shares.
However, there is one reason that most businesses will borrow money rather than sell shares in the business. Debt finance is normally available from organisations in smaller amounts than equity, and unless the company is very large it will be too small for formal equity.