Optimizing Debt Finance
Debt financing is, in short, all the money that you borrow from different parties to run, build or expand your business. Debt financing can be divided into two different categories: long-term debt financing and short-term debt financing. But when you need money to start, or expand your firm or organization and you have already decided to choose debt financing over equity financing, you should consider the tax implications of debt financing. A potential tax deduction you can receive for the interest that accrues on debt is undoubtedly appealing. However, non-tax advantages exist as well.
Debt financing normally comes in the form of bank loans, revolving lines of credit or even use of credit cards. But regardless of the creditor, interest charges on the amount borrowed is how these lenders earn their profits. To put it in contrast: all the money raised through equity financing is not paid back, so you won’t start in the red digits. However, the investors contribute money in exchange for a share of ownership in your firm, which means that they will benefit from the profits your business is making. If you prefer to keep full control over your business, the choice of debt financing is an easy one. Even though you have to repay all the money raised.
Optimizing debt finance
Because of the interest that accrues on debt can be tax deductible, the costs of the borrowing is less than the defined rate of interest. But it is complicated to find solutions to make this work, especially when you’re a foreign company based in the Netherlands. To deduct interest on debt financing as an ordinary business expense, the loan money must be used for business purposes only. Besides that, you must be legally liable for repaying the debt. This means that a legitimate creditor-debtor relationship must exist between you, the business and the lender. Because optimizing your debt finance this way, many firms decide to seek help in the form of debt financing specialists. Here at TGS lime tree, we can help you with finding out how to optimize your debt finance and we can make sure that the interest on your debt can be made tax deductible.
If you have any questions regarding debt financing, or optimizing your debt finance structure, feel free to contact our team of specialists. They can help you out with any questions regarding the subjects stated above.