As an entrepreneur, you solve a new puzzle every day while you experiment with different options. You grow along with your business. The ability to increase capital allows you to expand and earn more profits. In such cases, small business loans can be quite helpful from different companies and investors.
Funds are crucial in any business. Debt financing allows you to make money from different business or people as a loan to finance your business and then repay that money with interest.
The word “debt” may be enough to send shivers down your spine but we’re here to wipe the slate clean of all the bad reputation it has gotten in the past. It is safe to say that debt financing is essential to your business and should not be your last option. If you’re hesitant about how debt financing can be beneficial to your small business, keep reading.
1. The Business Ownership will remain yours indefinitely
The most significant advantage of debt financing is that you don’t have to give up the ownership of your business. When you take a certain amount of money from a private party or institution, the only thing you are obligated is to be able to return the payment timely. That’s about it. You won’t be giving up equity to fund your business in the form of stocks because in doing so, other parties start giving their input on how the company should operate.
2. Tax Deductions Apply
Tax deductions are also an advantage in debt financing. If you’re able to get the best commercial loans, a certain amount will be tax-deductible. It means any interest that you will pay on the money borrowed will be taxed if used for business-related activities. In such operations, the best way to go about is by hiring the services of a lawyer or tax professional that can plan your finances and also help you answer any queries you might have.
3. Lower Interest Rates
The first loan you will take for your small business will always be inexpensive. Due to the lower interest rate, your company shall not face any burden. It means that if a company you’re borrowing money from has an interest rate of 15% and you have to pay 30% to the government for your taxes, it makes sense to take such a loan that can be tax deducted.
4. Freedom and Flexibility
Debt financing offers more freedom and flexibility than any other business. Equity financing makes you answerable to your investors or lenders. They also get to have a say in how you run your business to seek a different outcome. It may also lead to a difference of opinion, creating a hostile environment for you. In debt financing, once you return all the money, your business won’t be influenced by any outside party.
Getting debt is also less stressful and much more comfortable because the paperwork is far less complicated (and less expensive) as compared to the paperwork for equity financing.
5. Debt Financing is more accessible
While there may be many alternative ways to generate funds for your business, not all of them would be available to you (being a small business owner). Many investors or capitalist parties like investing in “the next big thing” or a venture that’s already doing pretty good, which automatically disqualifies many small businesses from the list.
With debt financing, it’s easier for small businesses to work their way up.
6. Improving Your Business Credit Score
A Business Credit Score is a number that depicts how successful the business is and how reliable you are as a business partner. This number helps banks and investors to decide whether or not they should give you a loan. The business credit score depends on how quickly were you able to return the money borrowed and how comfortable the lender was with your business ethics and conduct. It represents if the cash flow of your business is stable enough to meet all monetary obligations. It helps other parties want to give you more loans in the future to help you expand your business.
7. Planning becomes easier
Once you’ve been running the business for a while, you’ll know how much effort and management is required. It allows you to make preparations beforehand and you can easily plan your monthly budget without worrying for any money left by the end of the month.
8. Debt Can Boost Business Growth
Use of debt financing for the long term can help you hire the workforce you need to strengthen the business, buy new equipment, advertise your products, and increase marketing. Low-interest long term loans help you get the money you need to keep your business afloat and get all the necessities out of the way. Once the company is up and running, you can pay the debt back and be more profitable and be in a position to need no loans again.