Whenever you borrow money with an agreement to pay it back, you are utilizing debt financing. This is a common method to gain capital for a business. You can borrow money from anyone, but it is most common to borrow from a bank or other financial institution. The main idea is that you are paying the money back and the lender is expecting to earn interest off the loan. So, this doesn’t include loans where the lender expects a part of your business as security or payment. Many business owners, though, try to avoid it because they don’t like the idea of going into debt to finance their business. The reality is that financing like this is often much needed and can offer some good benefits to the business owner over other options.
Benefit #1: Deductions on Taxes
Because a loan is an expense, you can deduct related expenses, like interest, on your taxes as a business expense. Increasing your tax deductions means more profit for your business.
Benefit #2: Lower Costs
When you factor in those tax deductions, it can actually make for a lower interest rate. This means it costs you less than trying to acquire money some other way. Not to mention that trying to get financing other ways can come with many associated costs that you have to take out of your business’ profits.
Benefit #3: Not Giving Up Ownership
The main alternative to debt financing is to get investors. However, when you secure an investor, you are going to have to give them something in return. Most often this is ownership in your business. By going through a lender and getting a loan, you don’t have to give up any ownership in your business. This can be a huge benefit, especially if you are a newer business with little profit coming in or if you are making a lot of changes in your business and don’t want to consult someone else before making them.
Benefit #4: Building Credit
By getting a formal loan, you are able to build your credit. This is especially good if you are trying to establish credit for your business. By building credit, you can set yourself up for the future and ensure that if you need help in the future, it will be easier and likely less costly due to a good business credit rating.
While it may not seem advantageous to go into debt to finance your business, that is the reality most business owners face. Focusing on the benefits of debt financing, though, allows you to understand how you can actually gain from this type of financing.