When considering to scale up your business, you’re either left with giving out equity for capital or borrowing a loan. In most cases, business owners tend to give out equity, which most financial advisors don’t suggest. And there are several reasons for it too.
We’ll come to it later in this article.
However, there’s one opinion that seems rather more beneficial- taking out a small term loan. Well, to begin with, these finance options are usually known as fast cash loans, as they are readily available. In other words, you can receive instant cash to cover up your equipment and resource costs without having to give away your equity.
Read on to learn more about how these fast cash loans can help better than equity.
Easy Funding For All Your Needs
When you plan to sell out equity in your company, you’ll need to face several interviews. The investors would most likely want to assess your success mantra before they invest in your business plan.
Besides, when you find the right angel investors, the cost of equity is unconditionally lower. To put this into perspective, selling out equity would mean sharing company ownership. And also, sharing the profits with the investors.
Of course, it would increase your company’s value in the market. But, at the same time, it would also mean that you own a portion of your own hardscaped business.
On the other hand, taking out fast cash loans is rather easier and more profitable. You still own your company completely, while meeting your urgent capital needs.
Most of the private lenders for business loans can process your application within a day or two, given that meet the necessary requirements. Moreover, rather than sharing the profits, you only have to repay the principal plus interest for a mutually agreed term.
Debts Cost Less Than Equity
Scaling up your business, would mean that you’d need to buy more inventory. Besides, you’d also need to hire more resources and invest in more equipment. Before buying stakes in your company, any investor would go through your business model. They’ll try to know the cost and profits margin of your business. Moreover, they’ll also assess the growth potential of your trade.
Depending on these factors, investors usually ask somewhere between 5% to 15% equity in company ownership. Now, selling equity in itself would, as already mentioned, mean that your company’s value increases. But, at the same time, this investment is going to take a share from your future profits as well.
Whereas, taking the same amount of loan would mean that you pay somewhere between 20% to 30% interest on principal. Though the interest you repay might seem higher at first, looking up closely you’d find that the term for this interest is limited. In other words, you’ll be paying the interest for a pre decided term only.
Now comparing both, the interest you pay and the profits you share, you’ll end up paying more to the investors down the line. It’s elementary mathematics.
There Are Tax Benefits On Debt
Another noteworthy benefit that cash loans can offer over equity funding is tax savings. While sharing equity actually splits up the tax to be paid, it does not reduce it altogether. To put this into perspective, every shareholder would need to pay tax on their profits and transactions that they make.
Whereas, taking out a loan would mean that you save taxes on the interest you pay.
Though it’s not as easy as it sounds, with little effort if you get to know how tax is levied you can have a ballpark idea.
As a rule of thumb, taxes are to be paid once per every product till it is retailed. In other words, every intermediate transaction does not necessarily include goods or services tax. However, only the profits earned are considered under income tax slabs.
Now, think of the loan that you take out. You’ll be levied income tax on the principal amount, as credits are synonymous with income. But, notably, you won’t need to pay any tax on the principle that you pay. The lender is earning profits out of it, so it essentially will be taxable for lenders only.
In short, taking out a loan still leaves you with a lot of greener grass on your side.
Short Term Loan Can Open Up Your Business Credit Line
Most noteworthy of all the benefits is that loans help build up your business’s credibility. While equity funding helps create your portfolio it does not help improve your business’s credit score.
To put this into perspective, think of equity as assets. Credit scores are generally dependent on debts and credits that your business is involved in. Since equity funding is similar to selling assets, it does not count one as debt.
On the other hand, if you take out a loan, it reflects on your credit history. Lenders consider this as a positive sign when lending out a loan to you. And to add to it, making timely repayments further helps improve your business’s credit score.
With a good credit score, you can perhaps expect to dig into a permanent credit line from your bank. A credit line is similar to a credit card, but only it is specifically for business purposes. You can take out as much as you need, and when you need, from your credit limit and make the repayments accordingly.
And the best part is, as you repay the loan your credit limit is restored. In some cases, a good credit history and timely repayments have proven to be helpful in increasing your credit limit.
To sum it up, taking out a fast cash loan can help your business in several ways, be it saving taxes or withholding the complete ownership. Equity funding, however, is only beneficial when you desire to scale quickly. But, it also has its shortcomings, such as sharing the ownership and profits among the stakeholders. In the end, it still depends on you-whether you want to grow slow but steady or you wish to whop up instantly.