What Are the Advantages of Debt Financing?

There are 2 primary financing options for the business owners for expanding and operating businesses. Owner’s equity is the financing process in which the business owner deposits his personal cash for the growth of the business. Debt financing, on the other hand, is a procedure involving borrowing of money from third parties in exchange of interest. In this article, we have discussed  the advantages of debt financing.

The most prominent advantages of debt financing is that it comes back with higher returns on the investments made by the business owner. For instance: a business requires a capital of $200 and returns a profit of $40 after a year. This means if the owner opted for investing $200 from his equity, he would enjoy a return of 20%. However, when the owner invests $100 and borrows the remaining $100 at an interest rate of 10%, he needs to pay a total of $110 at the end of the year. The remaining $30 of the profit amount remains in his pocket. This allows him to enjoy a 30% return on the money invested by him.

The next most attractive advantages of debt financing is that when a business owner pays interest on the debt, his tax burden automatically decreases. Majority of the US states consider the amount paid as interest on loans; let it be personal loans or business loans as tax deductible.

Most businesses fail to expand as a result of shortage of capital. If the option of debt financing did not exist, every business owner had to invest money for expanding their businesses from their own pocket. Debt financing gives every business, small or big the chance of expanding and capitalizing on the opportunities offered by the market.