4 Benefits of Debt Financing for your Business
If you’re a woman looking to start a business, you may be wondering about the best way to finance your venture. Grants for women to start a business can help them secure financing, but what if that’s not an option for you? Fortunately, other financing options like debt financing can be just as effective.
What is Debt Financing?
Debt financing is a way to pay for business expenses through loans. It’s different from equity financing, in which you sell a portion of your business to an investor who becomes a part-owner of your company.
Debt finance can come in many forms, from bank loans to mortgages. One example of unsecured debt is an overdraft with your credit card company, as it is not backed by any assets.
However, if it’s secured against something tangible like land or fixtures, the assets are absorbed into the price at purchase time and don’t need reporting as part of income anymore since they’re earning their keep already.
As an entrepreneur, you might be wary of taking on debt because it means you will owe money to someone else. However, there are some major benefits to debt financing that every business owner should consider.
Here are the top 4 benefits of debt financing.
Ownership of the Business Remains with You
Unlike equity financing, with debt, you maintain ownership of your business. This is because repaying the loan benefits you more than it benefits the bank, and they aren’t entitled to any equity in your company.
When you borrow from a financial institution, you’re obligated to repay the investment with interest. This way, you are able to retain the ownership of your business and are free to make decisions as you see fit.
Interest Expenses are Deductible from Income Tax
Interest is tax-deductible on secured debt, meaning that if you borrow money to purchase certain assets, these costs can be legally deducted against your business income and hence lower taxable profits. This can help you financially because not only do you avoid paying tax on your profit (your income minus allowable expenses), you also avoid paying tax on the money that should have been taxed.
Fixed Payments Make Budgeting Easier
Since you know your minimum monthly payments, it’s easy to budget for them and plan accordingly for future bills, especially if these include other debt payments like loans on a new truck or equipment for your business.
Flexibility of Repayment Terms
Most business loans are amortized over 5 to 10 years, with monthly repayments that can be stretched out or accelerated depending on your needs. You can even repay earlier if you have some extra cash lying around or sell some investments.
There are several types of debt financing options available to you. Different loan types will have their repayment terms, interest rates, and fees associated with them. You need to understand the details of each type before deciding which one is right for your business.
Not all financing options are available to you, so it’s a good idea to ask the bank you’re interested in working with what kinds of loans they offer for businesses. According to Lantern by SoFi, “Women sometimes don’t have the same opportunities that men do in the business world, so many companies and government organizations want to provide them with the opportunity to get a leg up.” Grants for women to start a business be useful if you don’t have the credit rating required for a loan.
In conclusion, debt financing is an excellent way for your business to grow and succeed, as long as you’re willing to pay the loan back with interest. When managed correctly, debt can benefit your company, both in terms of managing your cash flow and reducing taxable profits.