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Can Debt Be A Major Business Startup Tool?

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by Uday Tank

There are few words that strike as much fear – into the minds of entrepreneurs and business owners – as the idea of debt. Many business people, including Millennial entrepreneurs, are scared of the idea of getting into debts, and their worries are not unfounded. Scarred by the financial crisis that follows it, debt is correctly viewed as something that can sink or even upend a business. From the intimidating interest rates to the actual principal repayments, debt is indeed worthy of being scared of. It has the potential to eat up cash flow, while also preventing entrepreneurs from expanding their businesses.

That being said, there are however some situations where obtaining a line of credit, taking a loan, or tapping into other forms of debt can help you and your business grow. And guess what, even if you ever run into difficulty paying back your debt – which is near impossible if you take the right steps – you might as well exploit some debt management schemes like the ones you will find on this Scottish debt site.

Let’s now take a look at some of these situations and facts.

New product or service development.

No matter how fantastic your innovations are or excellent your new ideas appear to be, you will always need capital to bootstrap any business innovations you might have. While you may have wonderful ideas, and implementation strategies, the reality is that you will always need to produce a proof of concept before any investor will believe you. And sometimes, even after providing these facts, some investors might still not agree to fund your ideas. So what do you do? When you carefully analyze the financial pros and cons, you will come to realize that taking on a debt (in the forms of loans) might be the ultimate way to finish your new ideas and develop your new products and services.

Taking advantage of the tax code.

This is another unique way in which debt appears important to a business startup. The fact is that business interest payments are tax deductible, unlike payments made to equity investors which don’t consider tax payments. The effect of this will be better understood by this illustration: For instance, assuming you and your competitor generate equivalent revenue monthly, the business that has financed itself through debt will receive higher profitability figures than that which has financed itself through equity investors due to the tax code factor.

Stay in charge.

The truth is most business owners want to stay in control of their businesses, and what this means is that, they wouldn’t like to share the control and ownership of their businesses with someone else. In order to launch a business idea into reality, one needs to raise enough capital, and this capital may come in two forms. You can either raise capital in return for ownership interests in your business or you can obtain loans to finance your business. The former allows you to keep these funds for as long as you desire, while the later requires that you make repayments with interests. The trade-off in going for the debt option is that you get to stay in total control of your business, and considering that your business has an infinite life span, this is a good option. Debt can therefore be an important startup tool that helps you stay in charge.

Appears cheaper than other options.

When many people discuss debt, they are quick to talk about the astronomical interest rates, loan duration, and other applicable fees. These are further grounds to back up claims that debt is strictly bad for businesses. However, have you ever considered what it takes to secure funding from other sources, say equity investors? It is apparent that these investors request a share of profits over the entire lifetime of the business; many even require control of the business, and maybe a return on their investment in the event that the business is sold. So, ask yourself, is it worth it in the long run? If you take an in-depth look at the bigger picture, you will realize that taking up debt, as your primary source of funding, will save you money and control in the long run.

Conclusively, it is always great to kick-start a business with personal funding, especially when you are financially buoyant enough to do so. But, in a scenario where you are unable to fund your business ideas and innovations, it is very essential that you weigh the pros and cons of any funding source you would like to opt for; keeping in mind, however, that debt (loans) can actually prove effective and better in the long run.

 

Uday Tank has been working with writing-challenged clients for over five years. His educational background in family science and journalism has given him a broad base from which to approach many topics. He especially enjoys writing content after researching and analyzing different resources whether they are books, articles or online stuff.