Do you know why some brilliant minded people are unable to capitalize on their idea of launching a unique wholesale business? The lack of resources is one of the biggest reasons behind it. Since wholesale business is a huge venture as it deals in bulk quantity, it requires heavy start up capital. In order to raise this capital, entrepreneurs have two popular financing options at hand: equity financing or debt financing.
Debt Financing – A wise Idea!
Normally entrepreneurs invest a portion of capital from their lifelong savings and looks forward to accumulating the rest of the capital from other sources. I recommend them to go for debt financing, since it’s a better idea than raising equity through the issuance of shares to the general public. Debt financing involves borrowing required amount of capital from some bank or other lending institution and agreeing to pay monthly installments out of the profits of a company covering principle plus interest.
In order to promote wholesale industry, multiple financing options are being provided to perspective wholesale suppliers such as convertible debentures and various types of bonds. However, obtaining a regular business loan from a bank is still the simplest and most beneficial financing option. I am citing here how opening a wholesale business with a typical bank loan is a wise idea for modern wholesale suppliers.
All-time High Profits
In equity financing, wholesale supplier is required to share his profits with other owners (shareholders) of a business, which results in lower profits for the owner. On the other hand in debt financing, wholesale suppliers just pay an agreed monthly installment of a loan to the bank who is not the owner of the business. This increases their share of the profits which they can utilize for growth and early repayment of bank loans.
No Ownership Dilution
There are several business decisions which wholesale suppliers need to take on the spot for successful operation of a business. In equity financing, you are bound to take suggestion from other owners which delays the decision making process. On the other hand, there is no ownership dilution in debt financing and wholesale suppliers are free to run their business as they want without interference from others.
Saving in Taxation
In almost all countries, taxation law is flexible for firms running on debt financing. The principal plus interest which wholesale suppliers pay monthly is recognized as a business expense which is allowed to be deducted for calculation of income tax. On the other hand, the amount which wholesale suppliers pay to shareholders as a reward for their investment is not tax-deductible.
Debt financing offers better financial freedom to wholesale suppliers since the claim of the bank is only limited to the loan repayment period. Once the supplier pays out his loan, he has no third party claim and all profits belong to him. On the other hand in equity financing, claim of the owners is never declined. They have right in the current and future profits of a business according to a percentage of their investment.
Good Credit Rating
If wholesale suppliers pay their monthly installments on time, never miss any payment and get debt free within the stipulated time in good faith with the bank, it reflects on their credit score nicely. If a business ever needs financial help in the future either for expansion or meeting any business contingency, it becomes easy for them get the finance. In short, good management of bank loan opens the door for future borrowings.
Note: Though debt financing is a wise technique but its careful use is mandatory. Never use 100% debt financing and remember that an ideal blend of equity and debt financing is the key to success.