Only 0.03% businesses in the world get financed by VCs. Rest have to depend on debt financing or equity financing. Whether you are a small business, a flourishing private company or a major public company, debt financing is one of the easiest ways to run your business and raise capital when in need.
Debt could make or break a business. If you have clear financial goals and a solid repayment plan in mind, it will be very easy for you to pay off debt and keep your business intact. Here are some advantages of using debt financing for the company along with steps to manage your loans.
It lets you keep ownership
When you look for equity financing options, like finding a partner or a VC for your firm, you have to part with some percentage of your equity. In debt financing, your equity stays intact. However, note that if debt becomes too large for your equity, you will likely run into trouble. As a rule of thumb, never take debt amounting to more than 25% of your business at one time. No matter how many times you take a loan, avoid going above this number. Additionally, you can avail IRS fresh start program that helps taxpayers in IRS debt in tax paybacks. It can be beneficial for individuals as well as small business owners with tax liens, installment agreements, offers in compromise, and other charges.
Payments are tax deductible
Any payment that you make towards interest on loans, whether it is credit card payment or loan from individuals/institution, is tax deductible. Chapter 4 of IRS makes this provision for you. You should meet a few conditions like- you should be legally debt for the debt and must share a true debtor-creditor relationship.
It helps in saving some business and personal taxes too, depending on the type of business you have. It is important to mention here that your business may already have pending tax payments (that are known as back taxes) which could add up to a substantial amount. In such cases, checking if your business is eligible for the IRS Fresh Start Program (https://taxrise.com/fresh-start-program/) could be a good idea; it can help you save on payments to the IRS, which can instead be used to clear off your debts. Note that money that you borrow should be used for business expenses only. If you use your business credit card to buy appliances for your home, it will not be tax deductible.
The size of the business doesn’t matter
87% small businesses run on debt financing in the US. It is an easy, safe and practical way to run your business. Whether you have just started or are a third-generation family business owner, you can secure a business loan. In VC funding process, you may be tangled in a vicious circle of relentless growth to appease the investors, which could turn negative for your business. With loans, you manage your business the way you want without being answerable to anyone else.
Make sure you have a plan
Never take a loan without a plan to repay it. The amount of the loan and the interest you need to pay back should be well within your means. If you are earning $10,000 per month and have operational expenses upwards of $6,000, you cannot take a loan that makes you pay more than $1000 per month in interest. It will hamper your business’ progress as well as your earnings. Moreover, it can also affect your saving plan if you have one for retirement.
You should avoid loan repayments after being retired so ensure that you pay off all your debts before that. As for the people who want to spend their later life living in a community like assisted living for seniors, they may have to keep that in mind as well, when making a loan repayment plan since it can hamper your retirement savings. Lastly, when applying for a loan, don’t forget to negotiate and find the best offer on interest rates.
With this, you know everything you should about debt financing for business. Always remember, don’t take a debt unless you really need it.