Before we delve into how this business financial instrument might work for you, let us first see what debt financing is all about. If you’ve ever owned a credit card, then you will be very familiar with how it works. Essentially, all that you’re doing is borrowing some money, and then paying it back with interest at a future date. Due to this definition, it is easy to see that peer-to-peer loans, credit cards, businesses, and microloans and many others fall into the category of debt financing.
The Affirmative Reasons for Debt Financing
The very first one is the most important for business owners. Debt financing allows you to retain ownership of a said business. If you could not finance your projects, then chances are you may need to pursue investors – who will want equity in exchange for their liquid funds. Then, they will also have a say in the direction the business takes since they are part-owners.
Another positive attribute is the low-interest rates available through a solid understanding of debt financing with tax deductions. By using these together, you can enjoy advantages such as paying just 7% in taxes instead of the 10% that would otherwise be applicable in the absence of debt financing.
Lastly, there are the tax deductions benefits hinted at above. Often, when you take out a business loan, the IRS considers both the principal amount and the interest you’ll pay on it to be business expenses – thereby qualifying them for income tax deductions.
There Are a Few Drawbacks to debt Financing…
Most of these you will find reasonable – particularly the very first one: you must pay back the debt! There couldn’t be any lenders if borrowers didn’t pay them back (plus interest, to account for operating expenses). Somewhat intertwined with this is the possibility of high-interest rates – particularly if you go to a bank for debt financing. That’s why it’s often better to try alternative sources of funding.
Yet another drawback to securing debt financing is the expectation of consistent interest payments. The problem is, most businesses undergo periodic cash flow issues, which can hamper your ability to make on-time payments – and you can start incurring late fees. It’s a good thing there are many funding sources; choose wisely to maximize the benefits and minimize the drawbacks. Contact KPI Commercial Capital for more information.