-       You retain 100% ownership of your business.

-       You do not have to share future profits of your business.

-       You do not have to share day to day management decisions with others.  Your lender has no control in how you run your business. All they can require is for you to pay your loan back.

-       Using borrowed money to obtain business assets will allow you to keep your business profits in the company or use those profits to pay a return to the owners of the company.

-       Interest paid on the loan is generally tax deductible.

-       Obtaining a loan is difficult.  You will have to deal with lenders strict criteria to obtain a loan.

-       You will have to provide collateral such as property (real estate) or orders to convince bankers to lend money.

-       You will have to show lenders that the business has sufficient cash flow to repay its loans.

-       In most cases you will be using your cash profits to pay back the loans. If your business has a lot of debt, it may end up with a profit but not have any cash to show for it.

-       You must pay interest rate on the loan which eats into profits.  The riskier the loan is, the higher the interest rate will be.

-       Most lenders will require small business loans to be co-signed or guaranteed by the owner(s) of the business.

-       Too much debt may impair your credit rating and your ability to raise money in the future.

What You Should Know

When looking for money, you must consider your company's debt-to-equity ratio - the relation between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their business, the easier it is to attract financing.

A measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt.

For example, if a company has long-term debt of $3,000 and shareholder's equity of $12,000, then the debt/equity ratio would be 3000 divided by 12000 = 0.25. It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity.