Many business owners still think that debt is a bad thing. However, the truth is that debts can give businesses an advantage over their competitors. While you don’t want to fall into the debt trap, you can provide you with benefits, as long as you know how to use debt properly.
Businesses take on loans all the time in order to stay competitive. Even major corporations use loans to manage their finances better. Here are some of the reasons why businesses borrow money:
Interest payments are tax deductible –Your organization can save money every time you pay interest.
Improve cash flow— Borrowing can help improve cash flow, which enables you to hire more employees or purchase new equipment.
Expand operations— Borrowing is a cost-effective way of funding the expansion of your business venture.
Borrowing is a logical choice for businesses because it allows them to meet daily operational requirements and expand. Without access to such financial tools, most companies fail to achieve their goals, especially when they are just starting.
Debt over Equity
Financing solutions range from getting a loan to giving a portion of the business to an investor in exchange for money. Most business owners don’t know how to use debt, and that’s why they are clueless about how it can help their ventures. To find the right type of debt, make sure that you consider your priorities and type of business.
Debt allows you to keep full ownership of your business. On the other hand, you give up a portion of your business in exchange for funding when you choose an equity deal. Giving up a portion of your company also means giving up some control of the business decisions
The best thing about debt is that it is a temporary financial obligation. After paying it off, you don’t need to think about it again. Obtaining some debt also requires less legal paperwork compared to structuring an equity deal.
Avoid Falling into the Debt Trap
When borrowing money for your business, first make sure you can afford to. You must know how much money you need and avoid borrowing too much. You should do proper research before beginning so that you will know the amount that you can pay back.
If you are just launching your business, a bank might require you to use your assets and personal credit in securing a loan, which means that you must make sure you can repay the loan, even if your company has a slow growth rate.
When starting a business venture, make sure that you separate your personal and business accounts. However, small-business lending companies might want to look at your personal assets to find out if you can afford the repayments.
It is important that you don’t rely on financing too much. The goal of using loans for business is to provide you with a head start, solve your cash flow issues, or be used for expansion. When you borrow more than you can afford, it will just lead you down a spiral path. You can’t attract potential investors when they see the company has too much debt.
Get Better Credit Rating
When starting businesses, owners often use their personal credit cards to improve their cash flow. However, they should treat their venture as a separate entity. While it is tempting to use your personal credit, you should also build your organization’s credit score.
One way to get a better score is to ask suppliers to report your transaction history to major credit bureaus. You should also check your company’s credit history regularly to ensure that it reflects accurate data. There are instances in which items found in the report don’t belong to your organization. Checking your history once a month can save you time and money.
You should also analyze your finances to find weak areas and look for growth opportunities. Your business credit score both reflects and affects the growth of your business. Another way to ensure you get a good rating is to sign up for alerts. That way you can catch fraudulent activities as they happen.
The missed opportunities can damage your business, especially if you are just starting. Being unable to promote the business during a profitable season can lead to thousands of lost sales. Not having the purchasing power to grab good offers made by suppliers can also cause your profits to drop.
Financial disasters happen when you least expect them. That’s why it is important to have an emergency fund. However, there are instances in which the fund may not be enough. When that happens, you should turn to financial solutions.
Lowering Tax Costs
During the end of the year, you will probably be negotiating for the marketing budget for the incoming year. Consult your accountant on how much you need to spend to get the most deductions from your tax liabilities.
You should also ask your accountant what account you can prepay for the year or what account offers the best pricing. This way you can save money and reduce your marketing costs.
Credit cards often have reward programs that you can use to reduce your overhead costs. Just like you deal with cash, you need to make sure that you use the reward points wisely. Points are transferable to other loyalty programs that allow you to allocate them according to your requirements.
The average interest rate for credit cards is between 13 to 20 percent. If you are using cards for return on investment instead of expenses, then the speed at which you gain access to funds improves your profits better than it would be without using plastic. That makes them a powerful financing tool, even with high-interest rates.
If you need a $10,000 quick bad credit cash finance that you can repay within a month, then consider using credit cards. Just make sure that you pay back the balance at the end of the month each time you use them.
As you can see, debt really helps your business grow. There’s no shame in applying for a loan. Even large corporations get them when they need more capital. It is a good financial tool that allows you to stay ahead of your competition.