We hear about debt everywhere it seems these days. Thanks to the rise in average purchasing power over the last century, instant telecommunications and sophisticated financial analyzes, more and more people have taken on large debts. We go into debt for our homes, cars, credit cards, businesses, education and even unnecessary purchases. Despite the fact that people are going into debt for increasing amounts, it seems that still many of them do not understand the ins and outs of debt. Let’s take a look at this.
What exactly is debt?
At first glance, the term is simple: a debt is when a party owes something to another party. Debts, in general, can be tangible (for example: a specific amount that must be repaid at a specific time) or even intangible (for example: in favor). That said, when most of us think of the term “debt”, we think of it in the context of financial services. In this case, one of the parties, known as the debtor, has a contractual commitment with a third party, known as the creditor, to repay a loaned amount, generally with interest (the costs related to the service that is the loan).
What is the debt used for?
While the idea of debt is generally viewed negatively, debt is actually a powerful tool in our society. The fact remains that as with many things in life and in business, great power implies great responsibilities. Essentially, it provides the ability to use potential future earnings today. Financial companies offer services for money like any other business. You pay a plumber for pipes, a hairstylist for a haircut, a lawyer to navigate the legal system for you, and a loan company to give you the flexibility to spend money you don’t have yet. People use it for a variety of purposes, but for the most common small business owners are:
- Working capital – According to the Lendified Index, one of the most common concerns of small business owners is managing their working capital. In addition, 48% of business owners either rely on their personal line of credit or use it regularly to manage working capital. Small business loans can help you manage this working capital by providing short-term financing when you need it.
- Hiring staff – Hiring is one of the main motivations when a business has a capital need. New projects and opportunities that will bring future profits usually require short-term personnel investment.
- Marketing and Promotion – Sometimes you need to spend money to make it. Marketing, advertising, events and public relations are key elements in acquiring new customers and a loan can link the launch of a campaign to its results.
- Start or grow a business – Despite the increase in crowdfunding, angel investors and incubators, many small businesses still need a loan to start. This is especially true for storefront businesses and traditional small businesses that are outside of the culture of new start-ups.
What else do I need to know?
It is important to understand a few terms when talking about debt and the consequences of not respecting the contractual agreement. You should beware of:
- Interest rates – this is the rate you are charged for loan services incurred and presented as a percentage of the amount you borrow. They vary depending on the length of the repayment period, how much you borrow, your current situation and your credit score.
- Credit Score – this is the amount representing how much confidence the institution can have in you and expressed in numbers. It is based on your debt payment history. If you don’t pay off a debt, your score will drop.
- Duration of term – The interest rate may vary depending on the duration of your term. This is basically the period of time that you have to repay the loan.
Lendified is an avant-garde lending institution that responds to the needs created by the gaps left by traditional Canadian commercial lending practices. We can help you access a small business loan quickly, with terms ranging from 3 to 12 months to help you grow your business; all done with a simple online request.