Synopsis: Debt finance is among the most common ways to fund your business. Read along as we discuss why debt financing is a good funding option for businesses.

Small businesses frequently struggle with financial issues that hinder their expansion plans. This is because businesses require a substantial initial investment to get going, as well as continuous funding to ensure their success. They need funds to hire new employees, acquire merchandise, or buy equipment, among other things. But where do you get your money from? There are various options out there, one of which is debt financing.

However, don’t let the term ‘debt’ scare you away. Just like any other loan, it involves borrowing money to finance a business from a financial institution or lender, who charges interest on the money they lend. For business owners, taking on debt can be cost-effective to recruit new employees, buy real estate, replenish their inventory, or buy the equipment they need.

In this article, we talk more about debt financing and the various benefits it offers businesses to help you gain a more comprehensive understanding and make a sound decision.

What is Debt Financing?

Debt is the amount of money that must be repaid, and debt financing is the act of giving money to be utilized for business purposes. It entails borrowing money and then repaying it with interest.

Debt financing is a time-limited activity in which the borrower must pay back the loan plus interest at the conclusion of the predetermined time. A relatively low debt-to-equity ratio is also favored by creditors, which is advantageous to the business should it ever need to access more debt financing.

Another significant aspect of debt financing is that the loan is guaranteed or collateralized by the business taking the loan. Usually, this is covered by the secured loan, but if the loan is unsecured, then the credit line is usually small. 

Debt financing is used when a business requires a significant loan. The proprietor of the corporation attaches a part of the business’s assets, and a loan is then provided based on the value of those assets.

5 benefits of Debt Financing for businesses

Debt financing, in the form of small-business loans, is one of the most reliable ways to fund a business. Here’s a comprehensive breakdown on why debt financing is a good funding option for businesses:

1. Lower interest rates

You might be paying a high-interest rate on some of your unsecured obligations, such as credit cards and personal loans. This can considerably increase your monthly loan value. However, if you apply for debt financing, you will eventually pay lesser interest, particularly if you can secure a low-interest debt consolidation loan. 

2. Improves credit score

Taking out loans to pay off company obligations might help you build business credit, especially if you make on-time, complete repayments of the loans.

According to reports, lack of funding or working capital is one of the main reasons why small businesses fail. This is why if you’re looking for low-cost, long-term debt capital, having excellent business credit is essential.

Building the credit of your small business helps you avoid having to use your personal credit or other expensive business financing solutions. Additionally, having good company credit might help you negotiate better prices with suppliers.

3. Business retains ownership

The owners’ equity position in the company is not diluted by a loan because it does not grant an ownership stake. The advantage is that you maintain total control over your company during the duration because the lending institutions do not influence how you manage your company. 

The bank may charge you interest on the money you borrow, but they won’t meddle in how you manage your daily business affairs. Whereas, when you choose equity, you irrevocably cede some control over your company in exchange for capital.

4. Provides tax deduction

Regardless of the industry, the majority of interest payments made on debt are tax deductible. This means that because loan repayment payments are admissible as business expenses, they are tax deductible. 

As a result, your annual net tax liability is decreased, which lessens the corporation’s tax liabilities. In addition, you can deduct origination costs and gain access to a variety of other tax advantages.

A bonus tip: To get detailed information about how debt impacts your taxes, it’s a good idea to always see a tax expert or other financial counselor.

5. Ease of availability

Angel and venture capitalist investors are particularly picky about the size of the business they seek to invest in. On the contrary, debt financing enables businesses of all sizes to access working capital. 

Furthermore, acquiring the financing you need to expand your firm is a rather simple process. Debt financing is typically less complicated than equity financing because there is less compliance required, you don’t have to go through the laborious process of selecting equity partners, and you don’t have to negotiate and come to an ownership agreement.

Apply for Debt Financing with Protium

Businesses go for debt financing when they don’t want to invest capital of their own. Nevertheless, taking on too much debt can be problematic, so businesses must choose a debt-to-equity ratio at which they feel comfortable.

Debt financing is an expensive method of generating capital because the business needs to hire an investment banker to organize large loans carefully. Although, it is a reasonable solution when interest rates are low, and returns are high.

To achieve just that, you should consider applying for debt financing with Protium – a finance firm providing strong and revolutionary financing solutions. At Protium, we provide business loans with low-interest rates and zero collateral. To know more, give us a call at 8828827800.