The growth strategies of small enterprises are often hampered by insufficient funding. Businesses need substantial funds to start operation, but it also needs additional funds to keep the business running so it can thrive. You need funds to hire more people, purchase inventory, or buy equipment. But from where do you acquire the funds? There are several options available, one of them being debt financing.
Don’t be alarmed by the word “debt.” It’s borrowing money from a financial institution or a lender to fund a business. Like other loans, the lenders expect interest for the money they provide a loan. Debt can be cost-effective for business owners, allowing them to restock on merchandise, hire new workers, and acquire real estate or necessary machinery.
Also Read: Debt Vs Equity Financing: Which Is Best For Small Business?
Top Advantages of Debt Financing
The ownership of the business
Debt financing has many advantages, including the fact that you won’t have to give up control of your company. A banking firm or other lender’s only requirement when you take out loans is to make the installments on time. Instead of giving up equity in the form of stock to secure capital, you may be dissatisfied with outside influence on the direction of the business if you do so.
Can help in tax deductions
It is possible to deduct interest and principal payments on debt. The interest and principal payments on such a loan can be deducted from your company’s tax liability. If you have questions regarding how debt impacts your taxes, consult a tax specialist or financial counselor. You can save from taxes and use it as additional funds for your business.
Funds at a low-interest rate
If the rates of interest on credit cards, peer-to-peer lending, short-term loans, and other forms of debt financing are too high, none of these options will be useful. However, there is a silver lining. In terms of low-cost financing, an SBA loan is an excellent choice.
If you’re looking for low-cost financing, an SBA loan is your best bet. If you cannot secure an SBA loan, there are several other possibilities available. Just keep in mind the genuine cost of the loan you’re considering. You don’t want to get locked in a cycle of indebtedness, so borrow funds from a creditor who is completely transparent.
Make sure you know the complete cost of your loan, including interest and amortization, before signing on the dotted line. Do not proceed further if there are multiple payments each month or if you find the payment calculation to be too cumbersome.
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Builds your credit score
Shortage of working cash is one of the primary causes of small business failure. If you’re looking for low-cost, long-term debt financing, you’ll need excellent company credit. It is also critical that you have the ability to build up your company’s credit before you take out a loan. It’s easier to avoid using your personal credit or other high-cost business loan choices by developing a solid credit history for your small business. Having a good company credit score might also help you secure better deals with your suppliers.
Helps to grow your business
Long-term debt can be used to buy inventory, hire more employees, acquire real estate, increase infrastructure, or increase marketing expenditure. Your business will have the operating capital it needs to run efficiently and successfully throughout the year if you take out a low-interest, long-term loan. In other words, you can go the extra mile and have to put more effort into acquiring a loan to increase revenues in your firm. It will help you avoid ending up in a cycle of borrowing and being shackled to a money endeavor that could never succeed.
Avoids high-cost debt and saves money
As a way to jumpstart their business, many small business owners resort to pricey debt such as credit card balance transfers and cash advances or bank loans. As a result, this form of debt can have a negative impact on the company’s ability to operate smoothly. Debt finance has the power to reduce monthly payments by hundreds if not thousands of dollars by paying off high-cost debt. By lowering the cost of capital, you can also increase your cash flow and run your day-to-day business operation smoothly and efficiently.
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Avoids expensive debt
In order to convince firms to take up short-term loan advances, some lenders employ pushy sales tactics. Some companies that are short on cash will take 5 or 6 cash advances in succession. Borrowers who fall victim to this scheme may find themselves stuck in a never-ending cycle of debt. See if you can receive an SBA loan instead. Cheap borrowing costs, long durations, and low-interest charges are all advantages of SBA loans. It is possible to get out of debt traps for small business owners with SBA loans.
Available for all business sizes
Venture capitalists and angel investors are extremely particular about the size of the company in which they wish to put their money. Debt financing, on the other hand, makes working cash available to firms of all sizes. As a result, debt financing can be beneficial no matter what level your company is in.
You keep the profits
Since there are no creditors in a company with debt financing, there’s also no revenue sharing. Businesses are exempt from the requirement of sharing profits with their creditors. Profits can be retained by the company’s owner, who can then distribute them as he sees fit.
Also Read: Indifi Technologies Aims To Bridge The $380bn GAP In SME Debt Financing
Closing Thoughts
The advantages of debt financing are vital to consider if you’ve realized that additional finances can help your firm grow. Note that not all debts are equal. So, if you want to ensure the long-term sustainability of your organization, you should focus on maintaining a solid credit rating.
