Know More About Pros and Cons of Debt Financing
Like all types of financing, debt financing has both pros and cons. Here are some of the pros: Clear and finite terms. With debt financing, you’ll know exactly what you owe, when you owe it and how long you have to repay your loan bandarxl. Your payment amounts will not fluctuate month to month. No lender involvement in company operations. Even though debt financers will become intimately familiar with your business operations during your approval process, they’ll have no control over your day-to-day operations.
Tax-deductible interest payments. When it comes time to pay taxes, you can deduct debt financing interest payments from your taxable income to save money.
These are some downsides of debt financing:
Repayment and interest fees. These costs can be steep. Quick start of repayments. You’ll typically begin making payments the first month after the loan has been funded, which can be challenging for a startup because the business doesn’t have firm financial footing yet. Potential for personal financial losses. Debt financing comes with the potential for personal financial loss if it becomes impossible for your business to repay the loan. Whether you are risking your personal credit score, personal property or previous investments in your business, it can be devastating to default on a loan and may result in bankruptcy.
Key takeaway: The positives of debt financing are that all the terms are clearly spelled out, the lender isn’t involved in how your company operates, and interest payments are tax deductible. The negatives are that interest fees can be steep, you have to start making repayment quickly, and defaulting could have significant consequences for your personal finances.