Debt Financing in Hong Kong: What Do You Need to Know Before Incorporation
Raising capital for your business takes an excessive amount of time and strategies to implement. Business owners are constrained as to what actions they can do on fundraising. And perhaps, after the fundraising block, shareholders would like to see you achieve certain successes before committing to fund you further.
Such situations are where debt financing in Hong Kong comes into play. Now, before you get yourself wet with debt financing, here are things you need to know and the pros and cons of this funding alternative.
What is Debt Financing?
Business owners in Hong Kong who are in the initial steps of putting up their business can use business debt financing. It works like borrowing funds from Hong Kong banks, other businesses or lending institutions to start or support your business. Based on the loan agreement, the loan is subjected to a certain interest rate and is payable in a pre-defined time.
Debt Financing Pros and Cons
Debt financing is quite similar to business loans, but there are distinct features between them. Understanding the pros and cons of debt financing will help you decide if it is the appropriate choice for your business needs.
Pros of Debt Financing
Debt financing can be helpful if your business needs to:
- Cover the expenses for registering or launching your business.
- Support minor business expansions.
- Invest in strategies that may scale the business.
- Fund a project, such as an advertising campaign.
- Purchase equipment.
- Engage in an opportunity to increase productivity.
- Inhibit dispersion of shareholdings.
- Supplement the worker’s benefits to boost efficiency and productivity.
- Provide funding for constructing a commercial building for your business or a work-friendly office.
- Fund a workshop or training for employees to guarantee an efficient business workflow.
One of the primary reasons business owners rely on debt financing is that they’ve already given up a good chunk of assets. Trying to raise another one could compromise their proprietary rights to the point of losing their control of the business. That would further mean that they have to consider giving up voting rights and board seats.
Cons of Debt Financing
Even though debt financing is more reasonable than equity funding, it is not actually practicable. Most pertinently, it’s risky for businesses that aren’t in a stable hyper-growth phase.
Debt financing is typically the so-called “senior debt,” which means that if you face problems repaying your loan, the deficit extends over the outstanding obligations.
Another drawback of debt financing is that only businesses that have already reared venture funding can use it.
Additionally, debt lenders are in the first lien position with respect to traditional business loan agreements, implying that they would capture payments before any other creditors.
Furthermore, with default payments, lenders may seize ownership of, or compel a liquidation of, the business or its properties.
With that, if a business can’t guarantee the repayment of a loan, debt financing isn’t the best possible alternative.
Raising finances for a startup business is tricky. Proceeding with debt financing can be a good option — particularly if you’re proactive in implementing them.
However, things may go wrong, and your business might be compromised. It would be best if you seek a Hong Kong Incorporation Specialist from 3E Accounting Hong Kong. A specialist will save you from risks of falling into traps in your business decisions.
3E Accounting Hong Kong prides itself on providing business services and solutions across a global context. We offer high-quality services customized to meet our client’s specific needs. Contact us, and let’s be partners in setting the best plans for your business’ success.