It seems like these days you can’t go anywhere without hearing about debt. With the rise in average earning power over the course of the last century, instant telecommunications, and sophisticated financial analysis, more and more people began taking on large amounts of it. We go into it for our homes, cars, credit cards, businesses, our education, and even for non-necessities. But despite the fact that people are taking it on in increasing amounts, it seems that many still don’t understand the ins and outs of debt. Let’s take a closer look.
What is debt, exactly?
On the surface, the term is simple - debt is when one party owes another party. Debts in general can be tangible (in the form of clear amounts to be paid back at a specific time) or even intangible (in the form of general favours). That being said, when most of us think of the term “debt,” we mean it in a financial services context. This is when one party, known as the debtor, enters into a contractual agreement with another party, the creditor, to repay an amount lent, usually with interest (the charge for the service of lending).
What is debt used for?
While the idea of debt is often laden with negative connotations, in reality debt is a powerful tool in our society. But as with many things in life and in business, with great power comes great responsibility. In essence it gives the borrower the ability to use future potential earnings today. Financial companies offer services in exchange for money just like any other. You pay a plumber to fix your pipes, a hairdresser to cut your hair, a lawyer to navigate the legal system for you, and a lending company to give you the ability to spend money that you don’t have yet. People use it for a multitude of things, but the most common for small business owners are:
- Cash Flow - According to The Lendified Index, one of the greatest concerns of small business owners is managing cash flow. As well, 48% of business owners either rely on their personal lines of credit or use them regularly to manage cash flow. Small business loans can help with your business’ cash flow by offering access to short-term finance when you need it.
- Hiring Staff - Hiring is one of the most common driving factors behind the need for business capital. New opportunities and projects with the promise of future payoff typically require investment in people in the short run.
- Marketing and Promotion - Sometimes, you have to spend money to make money. Marketing, advertising, events and PR are key for customer acquisition, and a loan can bridge the gap between launching campaigns and seeing the results.
- Starting or Growing a Business - Even with the rise of crowdfunding, angel investors and incubators, many small businesses still require a loan to get off the ground. This is especially true for “main street” operations and traditional small businesses outside of the “startup” community.
What else do I need to know?
It is important to understand a few terms when it comes to debt and the consequences of not making good on your contractual agreement. You should be aware of:
- Interest rates - this is the rate at which you are charged for lending services expressed as a percentage of the amount that you borrow. They will vary based on how long your repayment period is, how much you borrow, your current situation and credit score.
- Credit score - this is the amount of trust a lending institution can put into you expressed as a number. It is based on your past history of repaying debts. Should you not repay a debt, this score will plummet.
- Term length - The rate at which you pay interest may vary based on your term length. This is essentially the amount of time you have to repay the loan.
Lendified is a cutting-edge lending institution that closes the gaps left by traditional Canadian business loan practices. We can help you get small business loans fast, with terms of 3-12 months to help grow your company – all with a simple online application.