Digikredit Finance Pvt Ltd. | 13 Aug, 2018
Every small enterprise needs business funding at some point or the other.
Now, to raise this money, most business owners need to make a tough choice: between
taking an SME loan and selling
ownership interests to equity investors.
is a way business can receive the required funds by selling shares in their
arrangement means that a business owner borrows money, to be paid back at a later
date, usually with interest.
options are viable and legal, it is important that you understand the pros and
cons of choosing one over the other.
Debt is usually less expensive than giving up
company is expected to perform well, debt financing can usually be obtained at
a lower, effective cost. Equity financing, on the other hand, costs businesses a
portion of its revenue forever. While you have zero debt with equity financing,
your personal profits are also slashed significantly for a lifetime as shareholders
will always be getting a share in your net profits.
is better? Equity funding means
sacrificing both current and future value to fill a short term need. With debt,
you incur interest costs, but it is temporary and capped.
Debt can be cheaper than opportunity cost
a small business needs SME loans to grow its operations but is able to attain
it only at an absurdly high rate. Even then, if the return on investment is
forecasted high, that business funding can be a strategically favourable choice
for a businessman who wants to open up new growth channels. Always remember,
whenever the return is higher, the debt is worth it.
Paying interest on debt reduces the tax burden
system offers an advantage to financing capital expenditures through debt. Under
the current tax law, businesses can deduct their interest payments on the debt
instruments. This reduces the tax applicable on any new business.
unfortunately, is not true of equity financing which is actually taxed twice.
Debt encourages discipline
is important in any business. SME loan boosts discipline by regularly matching
cash flow with financial statements and balance sheets. When a company opts for
business funding, its business operations are routine and unnecessary expenses
are held back.
Debt funding can be used as a
strategic tool for growing a business. As seen above, it is often a much
cheaper financing option than equity financing, which usually ends up taking a
larger share of your business' profits than a bank or other lender.
informed decision; weigh the pros and cons of both in order to keep your
** By association with Digikredit Finance Pvt Ltd., an NBFC, which
operates under the name SMEcorner and offers credit to small business owners.