Whether to install the latest machinery or meet a bulk order, your business needs an added capital inflow from time to time. You won’t always have the cash ready to pay for such needs. At times, even if you have the cash, investing it elsewhere could fetch you better returns. Read on to know why your business should go for debt capital while financing its needs.
Debt can be more affordable than investing retained earnings
Let’s assume that you need to buy raw material worth Rs. 1 lakh. The total revenue you will earn from selling the finished products is Rs. 5 lakh. Now, assume that you borrow Rs. 1 lakh at the cost of Rs. 30,000. Although this may seem steep, look at the larger picture in exchange for paying Rs. 30,000, you will earn a profit of Rs.3.7 lakh. So, you need to ask yourself: do the returns exceed the cost of taking on debt? If you answer in the affirmative, then choose a more affordable loan.
Net working capital
With Bajaj Finserv Business Loans, you can borrow up to Rs. 45 lakh at a low-interest rate and invest in improving factory infrastructure, building a new office, maintaining a healthy cash flow or anything else your business might need. This unsecured capital will get approved within 24 hours by submitting just a few documents.
Taking on debt offers better control
When you take a business loan, you have to pay interest on the amount you borrow. The benefit is that you have complete control over your business throughout the tenor. On the other hand, when you opt for equity, you permanently give up a portion of control over your business permanently in exchange for funds. A simple way to ascertain which option wins is to calculate the total cash flow you would have to let go of should you choose to give up equity. If the amount exceeds the cost of debt, you can be certain that choosing a business loan is a far better option.
Debt builds financial responsibility
If your company has surplus finds, it is easy to get complacent. Taking a loan will help you become more mindful of business expenditure. When you opt for a business loan, you plan your finances to repay your loan and thus, spend only when it is necessary. Also, if your business’ credit score isn’t high enough, taking a business loan and repaying it on time will give it a boost. This will help later when you seek a high-value loan.
Debt can help you save taxes
When you raise funds by giving up equity, you can’t avail of any tax benefits because dividends are an appropriation of profits. The interest you pay on a business loan is a charge against profit and is treated as a business expense. This interest is deductible from your net profit, whereas dividends are not. As a result, your company’s taxable income reduces, and so does your tax liability.
With these benefits, your business can easily choose to fund its operations with a business loan.
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