At some point or another, a small business is likely to need more working capital than it readily has on hand. Debt financing, which you probably know simply as applying for a loan, is a common method of receiving this capital when necessary and typically involves promising assets as collateral and repaying the loan (plus interest) by a certain date. Financing provides several benefits.
You Retain Ownership
When using a type of borrowing known as equity financing, you often end up with investors who want a say in how you run your business, which is usually uncomfortable at best. When you borrow from an outside source instead, you retain ownership of your company and can keep running it the way you see fit without worry of investors wanting to pull out.
You Can Probably Claim Tax Deductions
Sometimes, the type of debt financing you choose works in your favor as a tax deduction. In these cases, you can list your principal and interest payments as a business expense and deduct them from your taxes each year. This is especially helpful for up-and-coming businesses that need to save money wherever possible as they work to become established.
You Get the Proceeds
When a business owner chooses to use investors instead of borrowing capital from an outside source, he or she is agreeing to give a certain percentage of profits to the investor for a specified amount of time. When you borrow working capital instead, you get to keep your own profits and determine how to best use them to continue to expand your company.
You Can Plan More Easily
It’s easier to budget when you know exactly what you owe each month, and borrowing allows you to do just that. Because you know exactly what your interest rate is, how long you will be repaying the loan and how much you’ll be paying each month, it will be easier to create short-term financial goals. It will also help you to plan for the future after you are finished repaying debt.
Unless you happen to already be independently wealthy or have a family member or friend who is and wants to invest in you, the truth is that you simply aren’t likely to run a business without some type of borrowing. Debt financing is the best option if you want to create a business that is truly in your vision and not in the vision of your investors.