Debt financing is a form of funding where a startup borrows money and agrees to repay it with interest, rather than offering equity to investors. This allows the company to raise capital without diluting ownership among existing shareholders.
Why might a startup choose debt financing over equity financing?
Debt financing allows a startup to secure funds without giving up ownership. It’s beneficial for startups that want to retain full control while meeting capital needs, as long as they can manage the debt repayment.
What are the risks of debt financing for startups?
Debt financing requires regular repayments with interest, which can strain a startup’s cash flow, especially if revenue is unpredictable. Failure to repay debt could harm the company’s credit and limit future financing options.
How does debt financing impact equity holders?
Since no equity is issued, debt financing doesn’t dilute ownership, benefiting existing shareholders. However, interest payments and debt obligations may reduce funds available for reinvestment in the business.
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