Debt, What Is It Good For?

Most of us don’t care for debt. We’re taught from a young age that debt is a bad thing. In the average consumer’s hands, debt is often misused and mismanaged. People use it to get more of what they want now and end up paying more to get it.

We’re business people. We know that it takes money to make money and that debt can be used as a tool to create a better future.

Debt allows business owners to scale up their operations, invest in growth, and get more out of all their hard work. Without financing, you’re limited by your business’ ability to generate the free cash that you need to invest in long-term growth. You definitely care about growing your business as efficiently as possible. So consider debt as a legitimate source of financing and not something that’s inherently bad.

Financial benefits to taking on debt

  1. You can deduct the interest paid on debt from your corporate income tax.

The Canadian government allows you to include interest paid as an expense, reducing your taxable income. To see how this affects financing, let’s use an example. On our Marketplace, we rate risk from A+ to E. Loans that have a B+ is currently assigned an interest rate of 10.33%. But, when you factor in the tax break (at the small business net tax rate of 10.5%), you are effectively paying an interest rate of only 9.25%.

  1. Debt can be a much cheaper form of financing than equity.

Giving up any equity in your business can cost you a lot. By selling a portion of your business, you are selling a portion of your profits. Anyone investing in a business is going to want a substantial claim on your earnings especially in the early years when you don’t have a big bargaining chip. The long-term cost of equity can be substantially more than the interest you pay when you borrow.

  1. You can take advantage of opportunities now.

How many businesses take a pass on profitable opportunities because they reject debt out of hand? If borrowing $50,000 allows a business to take advantage of an opportunity that will earn them $70,000, they should re-evaluate their commitment to financing solely through savings. Even at 10.33% interest over 3 years, your total interest is only $8,360, meaning you’ve earned $11,639. That’s not factoring in the interest tax deduction or any additional recurring revenues you could earn with the $50,000 investment.

Debt Consolidation 

You have the option of taking out a loan to pay smaller loans, debts and other payments you are currently paying. They bring all your debts together and combine them into one large loan with fixed monthly payments. This is called Debt Consolidation. 

Each loan has its own interest rate and repayment terms, so it’s kind of impossible to merge them all into one. That’s why in order to consolidate debt, you need to get a larger loan to pay off those smaller loans that you want to merge together. 

Debt consolidation loans are mainly offered by banks, credit unions, and finance companies. There are also several reasons why business owners consider getting this type of loan. Here are some common ones:

  • Simplifying their finances
  • Save money by reducing their interest rate
  • Pay off debt faster

Final Thoughts

You could fill pages on how successful companies have used debt in a positive way to grow their operations—we’ve started doing just that on our Success Stories Page. Are there opportunities you could capitalize on if you had additional financing?

If your business can take advantage of debt to hit your long-term goals or capitalize on a profitable opportunity, you should seriously consider it. An application for a Lending Loop loan takes less than ten minutes to complete and is totally free. We offer annual rates from 5.9%, terms of up to 5 years and no early repayment penalties.

Need a loan to start or expand your business? We got you covered. Apply now!

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