Growing businesses have growing needs. Your business will inevitably need additional funds as it grows and prospers. You might need funds to purchase inventory, hire more employees, or purchase equipment to make your business operations run smoothly. A debt financing from your bank or NBFC can be helpful in such cases.
What Is Debt Financing?
A debt financing arrangement involves borrowing money from a lender to fund your business and repaying it later. You can repay this loan monthly, yearly, or by the end of the term. There are two types of debt financing: secured and unsecured.
Debt financing differs from equity financing, where investors get a share of the company in exchange for their funds. Overdrafts, bank loans, mortgages, and equipment leasing are the most common forms of debt financing.
Advantages Of Debt Financing
Here are six advantages of debt financing for your business:
1. Maintain Ownership Of Your Business
Venture capitalists and angel investors can be helpful to your business financially, but they also tend to interfere with your operations. Debt financing allows you to control your business decisions while collecting the funds you need. Lenders charge interest on the borrowed amount, but they won't interfere with your business.
2. Can Help In Tax Deductions
Tax deductions are one of the most effective advantages of debt financing. Since debt financing is classified as a business expense, you can deduct the principal and interest payments from your business’ income tax.
3. Builds Your Credit Score
When you pay your EMIs on time, your credit score improves. Hence, when you expand your business or create a new empire, you can obtain higher-value
business loans.
4. Accessible To Businesses Of Any Size
All small and medium-sized businesses may not have access to alternative funding methods. When looking for the next 'unicorn,' venture capitalists often overlook several small businesses. The debt finance option, however, is easily accessible to enterprises of all sizes (except for startups that have not been in operation for more than three years).
5. Fuel Business Growth
Debt can be used to buy inventory or equipment, hire new employees, or increase marketing efforts. Low-interest, long-term debt loans can give your business the
working capital to stay profitable and grow efficiently.
6. Low-Interest Rates
If interest rates are sky-high, credit cards, short-term loans, peer-to-peer lending, and other debt financing aren't helpful. However, low-cost funds are readily available through Small Business Administration (SBA) loans. An SBA loan offers low rates and long terms, making it the gold standard of low-cost financing.
Apply For A Business Loan With IIFL Finance
IIFL Finance can help you grow your business efficiently by offering lower EMIs, competitive interest rates, and convenient repayment terms than other public or private lenders. Additionally, you can access 24/7 assistance for any questions about your loan sanction or repayment. Obtain a business loan from IIFL Finance to fulfill the capital requirements for your business today!
Frequently Asked Questions
Q1. What are some examples of debt financing?
Ans. There are many types of debt financing, such as traditional bank loans, loans from family and friends, credit cards,
personal loans, government loans, and lines of credit.
Q2. What is the difference between debt financing and equity financing?
Ans. Debt financing is raising capital by selling debt instruments to investors, whereas equity financing involves selling shares to raise capital.
