What are Debts and How Debts can affect your Business?

When you are in the business world, indulging into different decisions and dealing with rushed but calculated actions are the norm. Sometimes, you need to extend your patience and widen your vision in order to come up with a much better solution to problems. In addition, in business, you need not only your own ideas and knowledge but you need the input of others Moreover, in times when your business situation are in the midst of rough waters and funds are needed to resolve such problems, even though we try to avoid it as much as possible, being involved with debts is inevitable.

Debts are obligations you owe from someone, may it be in the form of money or assets, that needs to settled upon agreement.

Usually, the debtor, the one who borrowed money, comes to the creditor, the one who will lend money, and discuss terms and conditions on how the accounts will be repaid. These scenarios occur far too often, may it be in small businesses or in large corporations. These are done by many business owners for varied reasons. Many companies and business establishments indulge into debts whenever they encounter financial problems on their business. These are the only way to the save the business from closing and to be able to save the employees working for them.

Types of debts business owners chooses and are often forced to get.

1. Secured debts

This type of loan where business owners need to give collateral to the loaning agencies.A collateral is a requirement asked by the financial firm to help secure its funds release. It is done in order to ensure that debts will be settled within designated the time frame especially when it involves large sums of money. The creditor has the right to collect the collateral once default occurs.

2. Bank and Credit Loans

This is the traditional way of loaning money. Basically, these involve monthly payments along with its principal interest added. For entrepreneurs who wants to have additional funds in their business or for those who wants to have an additional capital, this is their first choice. The agreed upon time frame will be discussed between the borrower and the representative of the bank.

3. Equity Financing

This is another way of borrowing money from investors but instead of paying the money, investors gets a share of your vision.In exchange for capital, investors would have partial ownership of the business. These can be applied on small and even large companies, which have lots of shareholders and investors.

Benefits of Debts

1. Maintain Ownership

Just as long as you don’t get involved on equity financing, you can still have the full ownership of the business you built. You remain at the head of your business. You’ll have the funds you obviously lack without having to sell what you’ve built.

2. Tax Deductions

When dealing with bank loans interest and finances, they are considered part of business expenses so they equate to a lesser amount of tax since they’re deductible.

3. Profit Retention

Even if the funds being used on business operations comes from loans, the amount of profit that will be gained if the business will succeed will be bigger compared to equity financing.

Effect of Using Debts on Business

All businesses undergo a type of debt at some point. Some businesses fail, while others continue to survive mainly because of its effective use of boost from loans. If business owners are wise enough and responsible on their actions handling management properly, even though acquiring debts get companies at risk, it is also a way to making businesses soar up high.

John Lewis is marketing lead at mybusinessloans.com.au. My business loans is specialized professional lending company, provide business loans, small business finance.