Category: Personal Savings
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Ranjit Punja

The conventional social wisdom in India about taking loans can be summed up in one phrase do not take on debt. This black and white approach to credit might not be advisable when it comes to your business. Using your savings to build a business is a part of the entrepreneurial journey, but liquidating your entire savings just to avoid taking on any kind of debt might not be worth the risk.

Often, individuals running a sole proprietorship, fund their business entirely on their own simply because securing a bank loan might seem a gargantuan task, or because they are hard-wired socially to avoid taking on debt - without quite understanding why they are not choosing the loan route. The upside of liquidating your personal savings is that you are saved the expense of paying interest costs, and you do not have to worry about repaying the loan amount. You also do not have to worry about potential creditors asking for repayment. That is perhaps, in a nutshell, the only advantage of using up your savings to finance your business.

Lets look at the other side of the picture. What are the advantages of opting for a business loan?

There are several strong reasons why you should choose to take a loan over using up your savings. For a start, liquidating your savings and not keeping any money aside for a rainy day either for personal or business emergencies is never a wise choice. If you need funds urgently and have used up your savings, you might be forced to take a personal loan which can be an expensive option, with interest rates sometimes going up to as high as 25%-30% per annum. In contrast, you can borrow funds for your business at a relatively lower rate of interest while at the same time enjoying the mental and monetary security of having funds to take care of unforeseen circumstances in the future.

Second, business loans need not be an expensive proposition. In fact, they may be cheaper than personal loans and you can get avail of a variety of business loans at attractive interest rates.

Third, retaining your savings and opting for a business loan can be a more financially attractive option as you can earn returns on your savings. You can invest your freed-up savings to earn interest or dividend income, while at the same time running your business with relatively inexpensive finances secured from a business loan. The money you earn from investing your savings may well be greater than the interest you pay on your business loan. Moreover, if you use up all your savings on your business, you might find it difficult to have the necessary credit profile to be approved for a business loan later, if the need arises.

Additionally, you can get a tax benefit on your loan repayment. The interest paid on a business loan is tax-deductible, so even as your savings are earning you income in an FD or in the stock market, you are saving tax on your interest payments on your business loan.

And finally, a business loan also gives you the flexibility to borrow as much as you need to operate your business efficiently and optimally. Restricting yourself to only your personal funds means you are limited by the amount you have saved, whereas your business might actually require a greater capital inflow that can only come from a bank loan.

Naturally, if you are planning to start a new business, it might require you to invest some of your own savings since banks might be unwilling to lend you the amount you require. However, it is still necessary to ensure that you do not liquidate your entire savings, and instead rely partially on a business loan, even in the early years. Entrepreneurship can be a risky venture and it is always advisable to set aside at least a portion of your savings to fund any untoward emergencies in the future. So, if the question is to borrow or not to borrow to fund your enterprise, a business loan is the simple and practical answer to the dilemma.