Overview
Having a hard time managing your finances? Rapidly accumulating debt used to be a cause for concern. But times have evolved, and borrowing money and making regular payments has become a common practice in a society driven by consumerism, which forms the basis of economic advancement. A business doesn’t solely rely on debt to address its deficits; it also utilizes it to thrive, expand, and fulfil unexpected needs. In fact, there are numerous financial benefits associated with business debt.
Here are the financial benefits of business debt
1. Scaling up your business
When you have cash flow, your enterprise is exposed to more opportunities like promoting itself and using effective marketing strategies. The funds can also be used for the acquisition of equipment and facility purchases. It can expand its range of product offerings. Money supply gives a chance for a business to spread its geographical boundaries. It helps in growing business in all aspects, i.e., finance, manpower, and technology.
2. Building Credit Score
35% of your credit score is based on your repayment history. The creditworthiness of the company can be enhanced by taking out a business debt. But to raise your credit score, you must ensure that debts and EMI payments are made on time and by the specified date. This will enable you to obtain additional funding in the future at a reduced cost.
Learn the key factors affecting your CIBIL score here.
3. Leveraging Debt-Equity Ratio
The debt-to-equity ratio evaluates your company’s overall debt in relation to the capital that the owners initially invested and the profits that have been held over time. A higher D/E ratio among firms of a comparable size denotes greater risk, whereas a very low one can signify that a company is not utilizing debt funding for expansion.
Compared to share capital, debt is also a preferable source of funding for a successful organization since it allows for more leverage. An investor for your business might expect profits but in the case of a debt, you just need to pay a fixed sum to the lender. You get benefits from the excess rate of return above the borrowing interest you pay.
A large business debt also provides us with leverage by paying off minor creditors. You might not have to deal with as many parties if you combine several minor debtors into one large one.
4. Managing Cash flow
A business has several challenges, like managing clients who don’t pay for services and having unsold inventory that needs to be moved to bring in new items. Cash flow is one of these issues. The frequent expenses for your workers, merchandise, utilities, rent, or mortgage make these problems much worse. A short-term debt might help your company survive lean times by giving you money to cover routine operating expenses. You may continue to bring in new clients to increase income and offset other losses by keeping money moving through your company.
5. Tax benefits
Taxes for your business might be costly. If not paid properly, your company’s prospects and financial security are in jeopardy. You may also avoid some taxes by using business financing such as taking a debt. This is so because the Income Tax Act has provisions stating that the portion of earnings used to pay back the debt amount is tax-exempt.
Thus, it serves as a useful tool for Enterprises to reduce their tax obligations and use the money saved for company growth.
6. Emergency Fund Requirement
When an unexpected occurrence has had a detrimental impact on your firm, you might employ an emergency business loan. If a lender is persuaded that you will stick to the agreed-upon repayment schedule, they will provide a loan for the following reasons:
- short-term expenses for marketing or advertising
- to assist with running costs (staff wages, bills, rent)
- You might utilize an urgent business loan to bridge gaps brought on by cyclical market times to support seasonal firms.
- To cover unforeseen costs, such as debt repayments and insurance payouts
7. Funding Support Even it is collateral
Unsecured and secured debts are the two different categories of debt. Taking up a secured debt entails pledging an asset as collateral. Holding an asset as collateral brings additional funding for your business which will have considerably more time value of money than monthly instalments, it can be helpful to expand your business operations. The debt amount is determined by your requirement and can cover any additional expenses coming as an obstacle to a big opportunity for your business.
Business Debt Funding at Terkar Capital
Business debt can bring several financial benefits. Firstly, it allows for business expansion, enabling opportunities for marketing, equipment acquisition, and product diversification. Additionally, taking out business debt and making timely repayments can enhance your credit score, facilitating future funding at lower costs.
Leveraging the debt-equity ratio can help your business grow and manage risk effectively. Moreover, business debt assists in cash flow management during challenging times and offers tax benefits. Finally, it can serve as an emergency fund and provide funding support, whether secured or unsecured.
