There are many financing methods aimed mainly at companies. Some are traditional and others more modern. But the truth is that they’re still used today. However, have you thought that a large part of them could cause you to end up with debts? Today, we’ll tell you 5 ways of financing that could get you into debt.

4 financing methods that cause debts

If you find yourself in despair looking for money, this blog post is for you. It’s very usual for any entrepreneur to consider it important to receive financing for their startup. In the best way possible. But what some of them ignore (especially beginners) is that they risk falling into a trap. The debt trap. Look at 5 financing methods that cause it.

Credit cards

They’re a double-edged sword. One of the greatest temptations not only of entrepreneurs. But for the whole world in general. A credit card is almost always used to get out of trouble. Or to go out in a weekend with friends. With regard to the business world, they’re still seen as a method of financing. That should only be used moderately.

The big problem with credit cards is that you can never skip a minimum payment. Because this affects your credit score. If you don’t pay on time, you risk reducing it and being penalized. Everything will depend on how much money you’re going to spend. Having too much debt with a credit card is dangerous. Because it can put you in a situation where you can never pay the debt in full.

credit cards financing debts

Bank loans

One of the most used and trustworthy methods. In fact, bank loans are a good way to obtain financing. When there’s a collateral and a way to pay off the debt, they can help you boost your business. However, they imply a risk if the emerging business in question lacks collateral. Or, if it cannot dispose of one in the stipulated time.

It’d be important to clarify that currently obtaining a bank loan isn’t easy. Since banks always make sure that their borrowers can pay their debts. In spite of everything, there’s always a risk involved. Some banks could request the mortgage of a property or private property. So even if you remain insolvent, you’ll end up losing something of value. Or with a very large debt.

bank loans financing debts

Microfinance

It’s curious because microfinance is almost always directed to impoverished sectors. However, it’s also a valid option for entrepreneurs. Particularly those who don’t have a fixed salary nor can apply for bank loans. This has allowed the creation of businesses in countries considered underdeveloped such as India. But in turn, it has also unleashed the “debt trap”.

In case you’re a low income entrepreneur, you should use microfinance with care. And opt for those institutions that charge fair interest rates. Avoid informal lenders and those who aren’t accredited at all costs. Because they can take advantage of your situation to harass you for the payment of the debt. If it’s not done with people of confidence and with caution, it’s possible to end up in debt.

microfinance financing debts

Loans from financial institutions or private individuals

Banks aren’t the only ones offering loans. There are specialized institutions that offer loans as a viable business. And in the same way, there are also independent individuals who have a lot of money to do so. The most trusted are those who comply with the law and charge corresponding interest rates. Since in each country there’s an entity that regulates legal interest rates.

The same risks present in a bank loan are also here. Especially when it comes to informal individuals or institutions. Either way, there’s always a risk when you receive a loan. Regardless of where it comes from, you have to make sure you can pay for it. This can be resolved through a well-defined financial plan. Whose purpose is to avoid falling into the trap of debt.

loans financing debts

All these financing methods are effective and can be useful for your startup. But if they aren’t handled with care, they can turn against you and put you in a compromised position. Nor should you abuse them because you only throw more debts over your head. Any investment to your business must be used to start it and start to profit.

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Beware of debts!