If you are the owner of a small or micro business then you will know that the urgency of the funds which you can need when you are facing any business-related problems. When you are looking for funds to invest in machinery, equipment, infrastructure, or even business expansion, you might prefer a business loan or anMSMEloanto to start a new business.
In fact, you can skyrocket your slow-moving business with additional funds and the help of new machinery. You can hire more skilled workers who can get you maximum results with less effort.
Let’s see why your business should avail of debt financing:
What is Debt Financing?
Even the best of the company’s balance sheets will generally include some level of debt. Debt is also known to as “leverage” in finance.
Banks are one of the most popular sources of debt financing, but the same can also be granted by a private company or even by a family member or a friend.
This is one of the technical terms in which you can borrow some money from the lender institution, bank, etc. When the lender will give you the money they will decide on the principle in which you have to repay the borrowed money at some interest rate. Many NBFCs will provide you with various types of business loans at competitive interest rates as per your requirements.
Pros of Debt Financing
As we know that debt financing has many cons but it also has pros that can make your business grow and can help in expansion. This will also maintain your cash flow and it will provide you with a great profit. Following are some of the pros which you have to know before you apply for a business loan or debt financing.
Maintain Ownership of your Business
There is an obligation to make when you agreed-upon to repay the debt on time when you borrow it from the bank or any other lender, but that calls for an end of your obligation. You shall retain the right to run your business without any sort of outside interference.
When you borrow money from the government financial institute then the deduction of tax will deduct from the business income tax. This will allow you to have some relaxation in the income tax.
Lower Interest Rate
When you opt for debt financing, interest is deductible from your total profit, however, dividends are not. And that makes your company’s taxable income lower down and so does your tax liability. You might check the MSME loan interest rates of other lenders and pick the best one that suits you.
When to Use Debt Financing?
A lending institution will seek installment of the payments on its loan very shortly after money is been lent. This means you’ll need funds to begin making payments in comparatively short order. When a business finds itself short in cash when its money is tied up in machinery or equipment or even if its customers aren’t paying. When you’re considering taking on debt, you need to ask yourself:
- Am I using these funds to invest in my fixed or variable costs?
- What are my customers like?
- Where am I in the organizational life cycle?
- What are the cons of debt financing?
Following are the cons of debt financing which you have to know –
- You have to pay back the debt in time
- Debt financing comes with high-interest rates
- Impact on your credit rating
- You might face cash flow difficulties.
- When I pay the debt back, relationship with the financial institution will end or not?
Yes. When you pay your debt back to the bank or any financial institute, they will end the relationship there.
- What type of debt financing loan will the bank provide?
You can take the short and long term loan from the bank and various NBFCs. They will provide you with the business loan and MSMEloanwith different schemes.