You have a startup venture. You need fund to finance its operation. The question is how do you get funds? Most startup ventures such as yours make use of debt. Banks happen to be the most sought-after source. You can also borrow money as debt from private money-lending organizations. When you enter into an agreement, either with a bank or any other financial organization, you make a promise that the principal will be returned together with interest within the stipulated time frame. There are debt packages of various kinds, and each varies from the other with regard to the term of repayment and the interest rate.
Free from Interference
You are borrowing finance from a bank or any other organization. The purpose as said before is to finance your business-related operations. The fact that you are borrowing money doesn’t put you under any extra obligations. You are only obliged to repay the principal with interest, within the stipulated time-period. This is one of the advantages of debt financing, the fact that you can run the show without any external influence. Secondly, you have the advantage of the tax deduction. Not only the principal that is borrowed but also the interest rates are exempted from the tax deduction. That’s because both these aspects (principal and the interest payment) are clubbed and classified under the bracket of business related expenses.
The beneficial aspects
You need not pay taxes for the business related expenses. In fact, tax deduction adds to the popularity of debt financing that is the money you borrow for funding and financing your operations. The packages offering debt financing have lower rates of interest than the other options of personal loan. Then, you already know that you can avail of the tax deduction. You can work both these aspects to your advantage and opt for a package that charges say, about ten percent as the interest. If you have thirty percent to pay, as part of the total taxation; then it is advantageous opting for the package that charges ten percent interest.
Should be properly channelized
You are aware of the advantageous aspects of debt financing, with the latter turning out to be the most significant source of funding. But you should also know how to channelize the finance in the proper direction. If you visit here, you will find how it pays to invest the resource (debt finance) in a significant asset. In other words, the debt finance should be mobilized in such a way that the prospect leads to the generation of cash. The flow of cash should be sufficient because very soon you will reach the period when the question of repaying the debt arises.
Should generate cash
It may be a bank or a financial organization. Both will seek install payment on the amount provided as the loan. So, you as the borrower should make sure that you have sufficient cash at hand. If you invest the borrowed money in an asset of the fixed kind, you will not be in a position to maneuver the flow of cash, but on the other hand, if you lock the money up in a variable asset; then, you can garner the inflow of cash. You ought to make sure that the money yields sufficient cash return because the debt financing needs to be repaid.