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What is Debt Financing?


Question: What is Debt Financing?
When seeking money for a business, an entrepreneur should consider the company's debt-to-equity ratio. That is, the relation between dollars borrowed and dollars invested in the business. The more money owners have invested in their business, the easier it is to attract financing.

Debt financing is borrowing money for a specific period of time that usually must be paid back with interest. Unlike equity financing, the loan source does not require a piece of ownership in the business.

Some typical sources of debt financing are banks, credit unions, savings and loans, finance companies, and the U.S. Small Business Administration. For smaller loan amounts, relatives and friends are also potential sources of capital.

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