India ranks third globally in the number of start-ups, which crossed 4,200, according to a NASSCOM report in October 2015. Start-ups are thriving in the country, owing to the competitive environment, better opportunities, better infrastructure modules and ease of finance. Finance is one of the most essential aspects for any corporate entity: whether it is a start-up or an established firm. The smooth flow of money is required to setup a business, for its day-day functioning and growth and expansion.
Advantages of Debt Financing
Start-ups may have a tough time funding their enterprise, especially in their nascent stage. Business loans are one of the most suitable options at this time, as well as in the company’s later stages. Here are few points that prove why start-ups should opt for corporate loans.
1. Reduces Personal Liability – Funding your business through your personal savings might have crossed your mind. Although it frees you of the burden of repayment, it comes with its own set of risks. Being a start-up, you can’t expect returns on investment during the initial years and there is a risk of loss as well. Moreover, it is wise to store your savings as an emergency fund. Also, you might be able to raise a much larger amount of money by seeking financing.
2. Ownership Remains Intact – Unlike angel investors and venture capitalists who own equity against their investment in the company, ownership rights remain intact when you take a business loan.
3. Tax Benefits – The interest payments are tax deductible. It is perhaps one of the biggest advantages that such form of financing offers.
4. Profits Remain Intact– Much like banks have no say in operational decisions, they also do not have a share in your profits. You can use the profits to repay the credit amount or you can reinvest it.
5. Long Repayment Tenure – Flexible repayment options makes it one of the most lucrative financing options. Such loans may have a tenure of as long as 10 years. The tenure differs according to the bank’s policy.
6. Builds a Strong Credit History – SMEs can have large sums of money to fund various business activities. Timely and early repayments help to build a strong credit reputation, which can help you to secure future loans.
Banks and other financial institutions are less than willing to offer unsecured loans to start-ups, owing to the lack of experience and short timeline of business activity. Firms can take loans against securities in such cases. Securities may include inventory accounts, receivables, equipments, insurance policies or property. Banks in India also offer property loans to fund business activities, both against residential and commercial properties.