Raising capital for your business is not easy. If you are a startup owner with a ground-breaking idea, you might have a list of venture capitalists and investors waiting to lend you money. But it’s not the same for everyday businesses. Even though you can raise capital through investors and venture capitalists, they take away your company’s precious shares and power. Equity investments are taken in exchange for equity which is not good when you have a fantastic idea that will undoubtedly be a success.
Debt financing is the traditional way that is used to finance businesses. It is available to everyday businesses as well as startups. While it may not look as glittering and appealing as raising VC capital, it indeed has many benefits and advantages that many people undermine. As we advance, we will discuss what debt financing is, and we will also look at the top six benefits of debt financing a business.
So let’s start with understanding debt financing.
What is Debt Financing?
Debt financing is the age-old way of raising capital for your business. Today debt financing comes in many different ways like business credit cards, loans, overdraft accounts, etc. Debt financing is mainly a loan that you are bound to pay back after some time. Debt financing can be done with secured and unsecured loans. With debt financing, you can save precious equity of your business and even raise capital, which is an ideal situation for you.
Having known about debt financing now is the time to understand the advantages it offers.
Advantages of Debt Financing
Tax Benefits
If you are a business owner, you’ll surely love tax benefits. You might keep a CA to advise you on different ways to save tax on your business income, but this is the simplest way of saving tax.
When you take a debt, the amount that goes into repayment and interest can be deducted from your income. This will significantly bring down your taxable income, and you’ll save a lot of tax.
Moreover, the longer the tenure of your loan, the more you can save on taxes in your business.
Less Interest Rate
Every government promotes entrepreneurship and self-employed people. To do this, banks provide loans at marginal interest rates. This gives a chance to the government to raise more jobs through businesses.
Today some banks provide loans at m
eager rates, and if you are just starting your business, you should indeed leverage these interest rates. You can take large loans without worrying about the interest you have to pay on them. As a business owner, this is a great benefit to you.
Moreover, there are many government schemes and initiatives that can be availed to take debt directly from the government. If you avail of those benefits, you can have very meager interest rates and prolonged periods of payback. You can even get moratorium periods on such loans.
Increased Credibility
Debt financing your business raises your credibility. Suppose you took a 50 lakhs loan for your business, and from day one, you are repaying the EMIs on time. Your financial position will be very strong, and no one will hesitate to work with you.
You will have a robust financial profile for your business, and this will help you anytime you need a new loan. Increased credibility also allows you to gain future loans at lesser interest rates and enables you to run the business on credit because people already know that you have a sound financial position.
Unlock Growth Opportunities
Debt financing unlocks tons of opportunities for your business. If you are earning well and have significant cash in hand compared to your EMI expense, you can expand actively. Moreover, you can also grow faster than companies that rely on VC funds and other sources of finance.
With Debt financing, you have access to funds anytime you need them. You just need to have a solid financial track record.
Save More From Profits
If you show debt on your balance sheets, you can easily ask for deductions and rebates on your total earnings. Doing so will surely help you retain a more significant chunk of your business profits. You can then redirect those funds to the growth of your business, earn more and expand rapidly.
Personalized Repayment Options
Debt financing provides you with the best repayment options. Compared to investor funds, where you are bound to give a particular share of your profit at determined terms, debt financing is different. You can personalize your repayment terms like the number of EMIs, interest rate, and even the deduction date for each EMI. All of these provide you with unmatched flexibility and a personalized repayment schedule. By now, you know the advantages of debt financing, so don’t wait for VC funds. Get a loan for your business and enjoy all the benefits.
