A business loan can have several benefits for your business if you know how to use it. However, for most new small business owners, taking out a loan is the wrong decision for running a business. They believe that it will make their business take on debts for only a few benefits for the most part. While that’s understandable, it only happens when you mishandle the loan.
If you fail to handle your business finances and add on a business loan, your business will take on a lot of financial burdens. However, as mentioned just now, if you’re smart with your business loan, there are two things you can do with it that can be very beneficial for your business.
It Improves Cash Flow
Your business will not be on top of things every time, especially when your cash flow is dependent on seasonal sales. For example, if you’re a manufacturer of Christmas goods, then your business will have tons of leads and sales as early as October until early January. However, for the time after the Christmas season is over, your business’s sales will go down considerably. In that situation, how will your business stay afloat?
A business loan is a flexible way to fill in gaps in your cash flow when the situation gets dire. You’re not alone if you’re currently struggling with your business’s cash flow. Even for non-seasonal businesses, there are times when sales are far and few between, and some owners even dip their hands into their finances to keep their business alive and kicking.
Of course, the daily operations of your business cost money. But at the same time, if you stop operating, your cash flow will stall until it comes to a dead stop.
Luckily, you don’t have to suffer through that. As mentioned earlier, a business loan is a good way to fill in those gaps. One major advantage of business loans is that they are cheaper than other short-term financing loans like merchant cash advances, credit cards, etc.
Even though you can take out loans in your name like CreditNinja installment loan options for your business, a business loan is still the best when it comes to financing your company.
A business loan is tax-deductible but with conditions. First, the business should come from a “real” business lender; one that’s allowed by the state to operate and has the proper licenses. In short, for the loan to qualify as tax-deductible, it needs to come from a traditional bank or a certified lender.
If you’re a startup who borrowed a business loan from your friends or family, we have some bad news for you. The IRS isn’t too keen on loans coming from family and friends because of how those loans are issued informally. Your friends and family might not be too strict on interest, and for the most part, those “business loans” qualify more as a gift.
For the IRS to consider your loan as valid, they need to see that you are legally liable for that business loan and intend to pay the loan according to the terms.
The second condition for your business loan to be tax-deductible is for you to spend it. If the funds on your business account that came from a business loan are just on standby, the interest wouldn’t be tax-deductible, even if you’re paying back the principal loan amount.
You have to use the cash you’ve been issued for its interest rate to be tax-deductible. This is mainly because the IRS would see this unspent cash as an investment rather than an expense, making it not tax-deductible.
It Builds Business Credit
If you’re trying to build business credit, taking out installment loans from direct lenders is excellent. Traditional banks and lenders alike typically send your business payment history to the major business credit bureaus. They will then extrapolate this data and other factors to calculate your business credit.
Of course, much like how a personal credit score works, your business credit will be used to estimate your business’s creditworthiness. And as such, if your business has poor business credit, then it will have a much harder time taking out loans. If it has stellar business credit, then financing will come easy.
These two points of interest are great benefits if you’re considering taking out a business loan for your business. There are some more if you want to continue your research, but the point here is that taking out a business loan is not that bad contrary to some people’s beliefs. If you know how to handle it and be smart with it, a business loan can be a helping hand for your business’s financial life instead of being another debt.