A lot of businesses make the mistake of thinking that debt financing is a bad thing, but in reality, it can be a great way to grow your business. In this article, you’ll look at some of the pros of debt financing and how you can use it to grow your business.
Reduces risk and provides security
What is debt financing? Debt financing is a way to get the money you need in order to grow your business. A lender will loan you cash in exchange for repayment with interest over time. You’ll make regular payments on the loan until it’s paid off, which can be in 5 years or more depending on how much debt you take on and what your credit score looks like.
You might wonder who would lend money to a company that doesn’t have any income yet, but debt financing is different from traditional loans because when banks give out these loans they usually expect some collateral (something of value) and have lower interest rates than traditional bank loans. This means it’s easier for companies without a steady income to get funding through debt than through equity investments or venture capital funding rounds.
Owners can keep full ownership of the business
When you use debt financing, ownership of your business is not transferred to the lender. Instead, a loan agreement is drawn up and signed by both parties. The loan will include terms such as interest rates and repayment periods that must be agreed upon by all parties involved before any money is exchanged.
If you decide to sell your business in the future, it’s possible for you to transfer ownership back to yourself or another person of choice without requiring approval from the lender. Ownership of businesses can also be transferred at any time during a debt financing contract; this means that if an owner dies or becomes unable to work due to health issues, etc., then their children or friends can take over without having any issues with their creditors (as long as they have enough collateral).
Interest payments are tax-deductible
As financial advisors like Lantern by SoFi state,“Another advantage of debt financing is that the payments you make on principal and interest may qualify as business tax deductions.” If you’re considering debt financing, you might be worried about the tax implications. But don’t despair! Interest payments are tax-deductible, which means that your profits are lower than they would have been otherwise.
Interest payments are a lot less risky than equity financing since there’s no risk of losing control of your business by selling off shares in it. Additionally, the lender holds all the cards because they’re doing more than just lending money—they’re also providing advice and counsel on how to run your company better or profitably. This gives them an incentive to stay involved for as long as possible.
Allows for more control over the business
Debt financing offers more control over the business and its financials, which can lead to more flexibility and growth. This means you can give yourself the freedom to make decisions that may otherwise be impossible with equity financing.
Debt financing also allows you to avoid having your business’s fate tied up with one particular investor who could make or break the company depending on their own personal interests and preferences.
In conclusion, debt financing is beneficial for many businesses and entrepreneurs. If you’re considering using it for your business or yourself, hopefully this article has helped clarify some of the benefits and drawbacks that come with this type of financing.