There is a myth that no debt is good debt. Whenever we’re talking about owing money these days, it’s almost always in a negative light. You hear it every day: homeowners are underwater, the national deficit is surging, consumers are saddled by shortsighted credit card spending, the nation’s graduates are buried under student loans. For businesses, the truth about debt is far less ominous. As the high finance set understands, not all borrowing is bad. For small business owners who might not have a masters degree in finance, keeping the following four things in mind will help them use debt to gain leverage, rather than getting weighed down. Paying interest on debt reduces tax burden.Many entrepreneurs aren’t aware of this surprise benefit of borrowing. The cost of interest reduces your taxable profit and, therefore, reduces your tax expense. The effective interest you’re paying is lower than the nominal interest because of this. It is this lower cost of capital that should be factored in when calculating the return from taking on debt. Leveraged buyout firms have used this strategy for ages to rake in the dough. Small businesses, too, can use it to improve their company’s finances. Credit Card PurchaseWith a debit card, you’re withdrawing money from your own funds, but with a credit card you are effectively borrowing from the provider for a short period. If you pay the money back in full by the due date, you generally will not pay interest.
However, if you pay less than the full amount, you will pay interest on the continuing balance. While interest rates vary from about 10% to over 20% for those with bad credit ratings, the average credit card APR is around 16%.
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