Debt is a dreadful word to any business owner. However, rather than being scared of debt, it can be used as a powerful tool to develop your business. Debt can be a threat to your business when it goes over your head but it is a calculated risk worth taking when you are careful.
Advantages of Borrowing
Before we explore the different situations where debt can be a boon for a business, it needs to be understood that business owners have always used debt as a tool for growth. There are certain advantages to borrowing when you are doing it strategically:
● Business taxes are exempted depending on the loan type.
● Cash flow becomes smoother when borrowing and waiting for income.
● Depending on the type of company you own, borrowing can be an inexpensive option to boost the business growth.
● Expanding your business becomes easier when you have a large amount of capital rather than waiting to save up enough money. This will be possible through a loan.
Here are a few ways to help you to make the most of your debt and use it for the growth of the business.
1. Develop a new product
Capital is essential to bootstrap your innovations and no matter how amazing you think they are, you have to convince the financiers about their benefits. The investors will need a thorough proof of concept to approve the loan you need. If you are confident of the idea and can convince the financiers about its profitability, getting a loan to develop and launch the product is a great solution. You can pay off the debt from the profits you earn.
2. Rapidly grow the business
A business loan during the initial days of the startup can provide the necessary boost to the business to stabilize it. You can use the loan to buy equipment or to open a new location- whatever helps to speed up the growth of your business. However, make sure you have a plan before you take the loan. If you are already in a critical financial state, a new loan can become a burden rather than a boost. To effectively leverage your debt, consult your accounts experts to get a clear picture of the overall financial state of your business.
3. Seek out tax exemptions
The interest on business loans are tax-deductible as opposed to the payments made to equity investors. If you consider the scenario where you and your competitor have an equivalent profitable business, the business which is financed through loans and debts will earn a higher profitability figure compared to the business cashing in equity investors. When your tax payments are exempted a considerable amount, it will mean you have more profit. You can also invest the surplus money on different aspects of the business to expand it further. Your bookkeeper and tax filing professionals can give you a concrete picture of the savings you have due to the tax exemptions. Consulting a tax expert will help you find out about different debt and loan policies for business which will give you the maximum tax exemptions, if possible.
4. Avoid business partnerships
Many small and medium-scale businesses often look for partners or shareowners to finance the necessary extra cash flow. However, the profit gets divided in this case and you will not be able to retain the entire amount. You will not have the absolute control of your business either.
Taking a loan to finance the business will mean paying interest to the lending institutions but you can retain the absolute ownership of your business. The entire profit amount will be yours to keep and it can be used to pay off the debt. The positive side of choosing debt over a partnership is you have your freedom and control over the business as the sole owner.
5. Build credit to increase your spending limit
Taking a loan means you are liable to pay it off on time to the lending institution. If you are diligent and make your payments responsibly, your company’s credit score is improved. A good credit score helps you to get better terms in loans and lower interest rates and even acquire a business credit card. Overall, the spending limit can be extended for the business which in turn will aid the growth depending on how you plan the expenses. This factor not only works for your business but for your personal finance as well.
A Word of Caution
When you are borrowing for your business, determine how much capital you will need to borrow before applying for the loan. Avoid borrowing too much to be on the safe side. You must have a realistic idea about how much your company can pay back. When you take unnecessary loans, it can be difficult to pay off if your company undergoes any unforeseen crisis and this will just add to your risks. Evaluate the potential risks before you are
opting for a loan.
Debt can help with giving your business a good start if you are strategic and plan the finance well. Your borrowing should be moderate to keep your balance sheet in order and your debt level should not repel your potential financial backers.
In a nutshell:
● Use debt to develop a new service or product which will help the business to earn a surplus profit.
● Invest in software, equipment, new locations, promotions or anything else necessary for the rapid expansion of the business.
● Enjoy tax exemption benefits as certain business loan interests are tax-deductible. You can invest the money you save productively for your business development.
● Retain sole ownership of the business and do not have to rely on investors and shareholders for financial backup.
● Paying off the loans responsibly on-time will improve your credit score which in turn will open scope for additional benefits.
Borrowing money for your business is a calculated risk. You can enjoy the above benefits, provided the money is judiciously invested.