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The Advantages of Debt Financing for Your Business

  • 2 min read

  • Highlights

  • Debt financing is borrowing money from banks or NBFCs

  • It allows retention of ownership with you

  • You can avail tax exemptions with debt financing

  • It helps improve your business credit score

Funds are necessary to start and run any type of business. When you go for external sources of finance, you have many options – debt financing being one of them. With debt financing, you take business loans from either banks or private non-banking financial corporations (NBFCs) to finance your business.

What is Debt Financing?

There are several types of debt financing. They include small business credit cards, merchant cash advances, term loans, and small business loans.

Each type has its own advantages, and you have to be sure of how much you need before you can apply for any of these. Therefore, be sure to research your options well, before choosing the one best for you.

Advantages of Debt Financing

There are many advantages to debt financing, from retaining control of your company to tax benefits. Here are the top six:

1. Ownership Stays with You: When you borrow money from a financial institution, you are only obligated to pay them back the principal amount along with a pre-decided interest. They do not have a say in how you run your business, unlike with venture capitalists. Therefore, you retain the ownership of your company and are free to make decisions as per your discretion.

2. Tax Deductions: Since the payments made to repay a loan can be counted as business expenses, they are tax deductible. This reduces your net tax obligation at the end of the year.

3. Lower Interest Rates: The tax deductions can lower your interest rates. Simply check the impact of the deductions on your bank interest rates. So, for example, if the lender charges you 10% and the government taxes you at 30%, there’s an advantage to taking a loan you can deduct.

4. Easier Planning: When you know in advance exactly how much principal and interest you have to pay every month, it becomes much easier to plan out your budget for each month.

Additional Read: Why Every SME Needs A Solid Financial Plan?

How To Get Small Business Finance From Bajaj Finserv

Dos and Don’ts when applying for a Business Loan

Business loans from Bajaj Finserv are designed specially to help growing businesses meet their financial requirements. Easy to apply for and hassle-free to avail, these loans come with several unique benefits that make them the ideal mode of business finance for small and medium sized enterprises. However, when applying for a business loan, there are certain dos and don’ts that you should keep in mind, in order to ensure that your application is processed smoothly. Here, we tell you what they are.

Dos and Don’ts when applying for a Business Loan

5. Accessible to Businesses of Any Size: Alternate methods to raise finance may not really be accessible to small businesses. For example, venture capitalists often discount a majority of small businesses in their search for the next ‘unicorn’, and creating an issuing bond is a difficult process at best. Debt finance, however, is an easy and accessible option for businesses of all sizes.

6. Builds (Improves) Business Credit Score: When you make your EMI payments on time, it adds to and improves your credit score. This, in turn, enables you to easily access funds in the future, when you may need it again.

Additional Read: What is The Importance of Your Business Credit Score

Moreover, a good credit score shows vendors and lenders alike that you are a responsible business owner and that your business’s cash flow is enough to meet its obligations.

Debt finance is, therefore, a good option to try for when you require funds. However, be sure that you can repay the amount you borrow. Once you’re sure, you can go ahead with your borrowing plans.

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