Another consideration is the expected economic life of the collateral. For example, items that rapidly lose value, such as seasonal inventory, are not normally acceptable as collateral for intermediate or long-term debt. When making loans to businesses with multiple owners, such as partnerships or corporations, banks may require a pledge of personal assets or a personal guarantee. Although some companies select equity financing, debt financing historically has been and currently is preferred by most small firms. The existing tax structure is one special reason for this.
Interest paid for a loan is deductible as a valid business expense.
It reduces the tax burden. Furthermore, the money obtained through borrowing is controlled by the owner of the business-control over the company is not diminished. Thus, where credit can be obtained at a favorable rate, debt financing is usually the better course for the small firm than equity financing, 3. Choosing the bank for your loan should be a careful decision and not based on relatively superficial grounds, such as convenience of location. Money from one bank is every bit as good as money from another bank, so it pays to shop around.