Why your business should opt for debt financing
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Why your business should opt for debt financing

  • Highlights

  • Debt is an affordable source of finance

  • Choosing a business loan offers superior control

  • A business loan inculcates sound financial practices

  • A business loan offers tax benefits to your company

Whether it is to install the latest machinery or meet a bulk order, your business needs an added inflow of capital from time to time. It is not always that you’ll have the upfront cash to pay for such needs. At times, even if you have the requisite cash, the returns of 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 to manufacture goods. The total revenue that you will earn from selling the 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 be able to earn a profit of Rs.3.7 lakh. So, the question you need to ask yourself is: Do the returns exceed the cost of taking on debt? If you answer in the affirmative, then choose a loan would prove to be more affordable.

Net working capital

With Bajaj Finserv Business Loans, you can borrow up to Rs.30 lakh at a low interest rate and invest in improving factory infrastructure, building a new office, maintaining a healthy cash flow or more. Besides, these are unsecured capital that get approved within 24 hours with only 2 documents needed for application.

Taking on debt offers better control

When you take a business loan, you certainly have to pay interest on the amount that you borrow. However, the benefit here is that all through the tenor, you have complete control over your business. On the other hand, when you opt for equity, you give up a portion of control over your business permanently, in exchange for funds. As simple way to ascertain which option wins is to calculate the total cash flow that 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 absolutely necessary. Also, if your business’ credit score isn’t as high as it can be, taking a business loan and repaying it on time will help give it a boost. This is sure to come in handy at a later date 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 any tax benefits as dividends are appropriation of profits whereas the interest you pay on a business loan, is a charge against profit as it is treated as a business expense. In simple terms, 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 choose to easily fund its operations with a business loan.

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