I am basically fascinated about knowing how people think and how they do business. In journey of My fascination, Some wonderful motivator helped me a lot. One them is Robert Kiosaki. I am following them on twitter and Facebook, so some days back, I read one status update from his wall of Facebook Fan Page that “Good Debt is Powerful Tools but Bad debt can kill you.” I was very surprised after reading this status. Because everybody knows that Bad Debt is bad but mostly no one knows how Good debt is powerful tool ? Because, When an average middle class persons like me and you talk around, we always find debt in negative way and we try to avoid being creditor of someone :).
So, For this reason I shuffled some online articles and my books of Chartered Accountancy and I found our some wonderful things. This things are a combination and comprehension of several resource with my limit of knowledge. In short, I am discussing these topics with my point of view. As I am not an experience person there might be other several reasons why you go for Debt.
Initial Capital Introduction for a Project :
Suppose, you have a wonderful and productive idea but, You don’t have capital to invest in, In that case, You can prepare your projected Operating Levels and Fiance report regarding cash flow and fund flow, submit it to the bank and they will approve loan or debt for you. Another option, If you are an existing company with good reputation then Debentures is also one great option. In short, debt is useful when you are in need of initial capital, but make sure your idea is worth.
Cost of Debt :
If you are sure that your concept or business will perform well then going for equity or partnership may lower your return, so in that case debt is a better option. It’s obvious that in that case debt is cheaper option then the equity. This debt allow you to earn risk premium. 🙂
Leverage your Earning with debt :
It means, suppose, you are earning 20% return on your investment on your project. You introduced 7 lakhs as debt of 12% and other 3 lakhs as equity. Total capital employed is 10 lakhs. In that case, you are earning , is 10,00,000 x 20 % = 2,00,000 Rs. Out of this interest cost = 7,00,000 x 12 % = 84,000 Rs. So Available Earning for Equity is 1,16,000 . So return = 1,16,000/3,00,000 = 38.89% . But, If we will invest 10 lacks RS all of equity then We would only get 20% As a return on that project. So this is how you can leverage your earning with debt.
Government’s Taxation Policy :
If you are forming company to do the business, then surely debt would be the better option as you can get deduction for interest paid on the debt like debentures, loan ETC. This is actually a great option which allow company to earn better earning per share. This not only increases founder’s share but also decrease the tax burden and All Indians knows how much taxes are levied on income 😀
Limited Liability in PVT LTD Companies :
I admit that This is actually kind of negative approach which I am discussing here, but when I write article I write everything which come to my mind. So, When you go with the company and raise the debt in that case, as a share holder your liability is limited to the Equity Share Value, So you will not be forced to replay the debt which is raised by the company from your personal asset. Those debt can be repaid from the company’s assets only. 🙂
So, These are those points which I wanted to discuss with you, and I hope certainly you found something interesting in this article. If you like this then please share it on social sites site. 🙂 thanks…