When a company has immediate or short-term financial needs, it can finance these needs by issuing debt. Debt financing, in layman’s terms, is borrowing money from investors or lenders and promising to pay them back the full amount, plus interest, in a predetermined length of time. Firms commonly issue debt by way of the sale of bonds, bills, or notes to individuals and/or institutional investors. Here are five advantages to using debt as a method of financing your business needs:
No future lender’s claims:
Once you’ve re-paid a lender in full, they have no direct claim on your future earnings. Even if what this loan paid for resulted in your business’ revenue/profits/assets to double, the lender is still only entitled to the face value of the loan plus interest.
You maintain complete ownership of your company:
Other methods of financing may require you to dilute your share of your business in exchange for financing, whereas debt simply renders you obligated to pay back a loan to the investor that lent it to you. Once that investor has been re-paid the agreed-upon amount in the agreed-upon time, your obligation to them is over and your business engagement is completed.
Fulfilling short-term needs:
Debt financing can easily be secured in a short amount of time on a short-term basis. This makes it quick and easy for smaller businesses to finance short-term business needs.
In most cases, the principal amount and the interest payments on a business loan can be classified as a business expense, and thus can be deducted from your business income taxes. This lowers the actual cost of the loan to your company.
Forecasting future impact:
The principal payment and interest payments on a loan are based on fixed interest rates on the amount of the loan and the length of loan’s term. This allows you to properly and accurately forecast the impact these payments will have on your business.