Could you ever imagine that debt and taxes can make smart entrepreneurs rich? It is not about career opportunities, earning potential or being rich or poor, it is purely financial education. Why do you think some businesses take huge amount of debt and are easily avoiding taxes legally and ethically, while others constantly struggle with it? Get to know how they do it and avoid any loss due to ignorance and pave your path to success, consistently and efficiently.
How to use debt smartly?
Debt is the money that is borrowed. All loans are not equal and it’s important to choose the type of loan and lender wisely. Other than that, there are certain other tips to have an upper hand while taking debt.
Here are some points that can help you not shy away from debt, but at the same time to take care not to drown in it:
- Choose the right debt instruments: Debt is known to be the new money now. The rich have known to use good debt or investor debt, but the poor generally pile up bad debt or consumer debt. For a smart entrepreneur, it’s important to understand this difference. Good debt is that which has lower interest rates and gives good returns for which student loans can be an example. Bad debt has high rate of interest and can be risky. Credit card can be an example for this, if not used properly it may put you in more trouble than gain with its high interest fees. Though nothing exactly can be classified as good debt or bad debt, it is important to select wisely a plan that rightly suits your needs. While venture debt is the norm now for established companies, startups can take help of structures such as convertible notes, KISS (Keep It Simple Securities) and SAFE (Simple Agreement for Future Equity). These eventually turn debt into equity that gives a good advantage for people to partner with you in the long run.
- Accept the fact of risk and be prepared: Uncertainty cannot be avoided in any segment but, financial education gives you a lot of control over risk. Know the market, be it agriculture, energy, service sector or real estate. Learn about the specific market and its trends which helps to have control over investments. It is also important to know the loan financing terms such as variable interest rates can dramatically change effecting the repayment patterns. Many finance gurus advise to avoid borrowing at any cost which cannot be true. You get an asset in your name and you are not taking the debt for nothing. The only time debt becomes really a debt is when your liabilities are more than your assets. So, plan your expenditure well ahead and as the golden rule for money applies, ‘Spend less than you earn’.
- Try paying off the tax-exempt interest money: Debt, unlike equity doesn’t require you to give up any part of ownership and interest and with a fluid line of credit, you can easily pay it off with lesser interest. You may not pay the loan immediately and that’s okay. There is nothing wrong in using liabilities to build wealth by correctly leveraging loans to grow your business and by investing it in your area of expertise. However, most business loans also have a lot of tax deductions like student loans. And, it is advisable to pay off the interest money to get tax exemptions as well as to avoid landing up with a lump sum amount to be paid later.
- Keep personal and business debt separate: Entrepreneurs have to pay the debt sooner or later. If you end up burning cash in the starting years, you still have to pay monthly debt payments. In case you have not separated your personal and business debt, any case of default can lead to collateral damage. Home, cars, kid’s college fund, etc. all can be affected.
Lessons to learn from the current decade have been many. Bhushan Steel and Essar Steel have seen some major defaults while lenders such as the largest banks of State Bank of India and Punjab National Bank have been facing some tough times in recovering money. The collapse of Kingfisher Airlines and the fraudulent acts of the diamond manufacturer, Nirav Modi are some examples. Added to it is the current problem of Jet Airways whose total debt adds up to about rupees 11,261 crore as per BusinessLine.
When dealing with debt, you have to be absolutely sure of your ROI being more than your after-tax costs. In cases where you repay the debt in its time with good planning, it can be your best friend in the time of need.
In the coming years, hopefully, debt won’t be a bad word. Currently, household debt in India is at 11.3% of India’s GDP from 8.7% in 2011 as per Forbes. Though it’s way behind China at 51.5% and US at 76.4%, but it’s consistently increasing. Corporate debt to GDP ratio in India was 17.14% in June 2018 as per RBI data which is also forecasted to rise marginally. Consumer debt and corporate debt are likely to increase in India and with economic expansion in low-inflation regime, we need not be afraid of debt in the next decade but, at the same time must use it wisely.
— B. Sai Shrita