Debt Financing is a fancy way of saying that you're borrowing money for your business. Your repayments will likely include principal and interest.
Sources of Debt Financing:
You: Sure, you can loan money to your own business. Shareholder loans can result in tax savings.
Friends and Family: The most common advantage is that they may charge you a lower rate of interest and flexible payment terms. There is a risk, of course, that you might cause damage to your personal relationship in the event that things go awry.
Financial Institutions: Banks, trust companies, commercial lenders are always looking to lend money to viable businesses. Expect a thorough due diligence process, extensive documentation and possibly some restriction on how you run your business (and possibly some loss of control) before they "show you the money"
Government Loans: There are various programs available through the provincial and federal government for eligible businesses.
Types of Loans
Small business loans generally fall under two categories:
Operating Loans - These are loans to finance the day-to-day operation of your business and these loans are generally required when your business runs into cashflow problems. There are four kinds of operating loans:
(a) Revolving Line of Credit - a reserve fund that you can dip into periodically and keep contributing to when cash is readily available.
(b) Non-Revolving Line of Credit - loan given for a specific purpose such as the purchase of a new machinery or vehicle.
(c) Inventory Loan - As the name suggests, the loan is restricted to the purchase of inventory for the business.
(d) Accounts Receivable Loan - loans made based on the value of monies owed to you by your customers.
Term Loan - Usually a set amount for a specific purpose, the term loan matures over a specific period (one to five years is common) and the borrower makes regular payments of principal and interest.
Loans can either be secured or unsecured. A secured loan is where the borrower pledges certain collateral to the lender which the lender can call on to recover the loaned amount (in the event the borrower defaults on payments). Unsecured loans, in contrast, have no collateral pledged against the loan.
As a small business, you can expect that banks are likely to want to secure the loan (and thereby assure payment).
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