Advantage of Debit Financing

Access to capital fund is one of the biggest challenges or barriers small businesses faces when looking to implement growth strategies. That’s why it’s important to understand both the advantages and disadvantages of debt financing. A resounding truth in business is that it takes money to make money, but it takes low-cost money to last. And where will that money come from? There are lots of options.

What is debt financing?

Essentially, debt financing is the act of raising capital by borrowing money from a lender or a bank. In return for a loan, creditors are then owed interest on the money borrowed.

Debt can be cost-effective, providing growing businesses with the funds to stock up on inventory, hire additional employees and purchase real estate or much-needed equipment.

Advantages of debt financing 

You won’t give up business ownership.

One major advantage of debt financing is that you won’t be giving up ownership of the business. When you take out a loan from a financial institution or alternative lender, you’re obligated to make the payments on time for the life of the loan, that’s it. In contrast, if you give up equity in the form of stock in exchange for funding, you might find yourself unhappy about input from outside parties regarding the future of your business.

Tax deductions.

A strong advantage of debt financing is the tax deductions. Classified as a business expense, the principal and interest payment on that debt may be deducted from your business income taxes.

Low interest rates are available.

Credit cards, peer-to-peer lending, short-term loans, and other debt financing isn’t helpful if the interest rates are sky-high. However, there is good news. In Malaysia, Cooperatives are offering a great option for low-cost funds. 

You’ll establish and build business credit.

According to Investopedia, one of the primary reasons why small businesses fail is a lack of funding or working capital. Stellar business credit is crucial if you’re seeking low-cost, long-term debt funding. Therefore, having the ability to build your business credit is a major and crucial advantage to taking out a loan. When you build your small business’ credit, you reduce the need to rely on your personal credit or other high-cost business financing options. Good business credit can also help you establish more favorable terms with vendors. 

For established businesses looking to expand and open new locations, strong business credit will provide the credibility lenders look for when approving a loan application. 

Debt can fuel growth.

Uses of long-term debt include opening new store locations, buying inventory or equipment, hiring new workers and increasing marketing. Taking out a low-interest, long-term loan can give your company working capital needed to keep running smoothly and profitably year-round.

Debt financing can save a small business big money.

Often, small business owners rely on expensive debt, like credit cards, cash advances or lines of credit, to get their business off the ground. This type of debt cuts into cash flow and can hinder day-to-day operations. A big advantage of debt financing is the ability to pay off high-cost debt, reducing monthly payments by hundreds or even thousands of dollars. Reducing your cost of capital boosts business cash flow.  

Bigger businesses can benefit from debt refinancing.

Debt refinancing is useful for businesses that already have debt and want to renegotiate the terms to make them more favorable. Essentially, you take out a new loan to repay your existing debt, allowing you to update your lending agreement to something that works better for you. You can get a lower interest rate this way and even improve your credit score.