"Debt" is a nasty word to a lot of consumers, but in business, debt is a perfectly normal way to finance the purchase of assets or use a backup for short-term interruptions in cash flow. In some ways, debt is preferable to equity financing: When you borrow money, rather than accept it from an investor, you don't have to give up any ownership. However, small businesses, especially new small businesses, have more limited debt financing options than larger or more established companies.
Loans
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Perhaps the most obvious source of debt financing is a business loan. Entrepreneurs commonly borrow money from friends and relatives, but commercial lenders are an option if you have collateral to put up for the loan. If you're just starting out, that may mean pledging your personal assets, including your home. (The "second mortgage" has a rich history of financing startups.) Once your business is established, you may be able to pledge the assets of the company itself.
Installment Purchases
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A business that takes out a mortgage on a building, buys a vehicle with a car loan or purchases equipment with dealer financing is doing nothing more than acquiring debt financing. Someone -- a bank, finance company or the actual seller of the asset -- is fronting you the money to buy the assets. For new businesses, the ability to purchase assets with debt may depend on the owner's personal credit rating. A mature business that has built a solid credit rating of its own is more likely to be able to access financing independent of the owner.
Revolving Credit
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Whether you use credit cards for smaller things such as office supplies or miscellaneous expenses or for major spending categories such as inventory and capital assets, they represent a form of debt financing. Businesses can also obtain a line of credit -- a pool of money it can borrow from when needed. As with other kinds of debt financing, access to revolving credit may initially depend on the business owner's personal credit rating. With time, though, as the business demonstrates it is capable of managing its debt, it becomes easier to borrow money on its own. Business credit cards are a good way to start building that credit rating. Many retailers cater to small businesses -- office supply stores, home improvement stores -- offer special credit-card programs specifically for the smaller company.
Trade Credit
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With trade credit -- "buy now, pay later" arrangements with suppliers -- your vendors are the ones providing the debt financing, even if it's relatively short-term. If you receive an order of inventory with 30 days to pay, you've got a month's worth of debt financing for the cost of that inventory. A business just starting out may not have immediate access to trade credit. It will typically have to prepay or pay on delivery until it demonstrates to suppliers that it has the money to meet its obligations.
Bonds
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Small business people likely don't give much thought to using bonds to raise money for long-term investment. Even so, it's an option to at least keep in mind for down the road, once the company is firmly established and needs capital for growth. Local governments have bond programs in which municipal bonds can be sold to finance smaller business' capital projects, to be paid off with money generated by those projects. And some small companies raise money by selling bonds themselves -- although because of the risk involved, such bonds typically have to pay a high rate of interest and are saddled with the term "junk bonds."
