If you want to start a business and are looking for financing, you can always get a business loan from banks, non-banking financial institutions, or other private lenders. You may need a business loan or maybe expanding the business or the company, hiring new staff, increasing the inventory or purchasing new materials, a new office space, or even renovating your old one.
So, once you know the purpose for which you need a business loan, you can think of ways to avail of one.
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Types of Business Loans
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Business Loans are of two types. The first one is a secured business loan, while the second is an unsecured business loan. The major difference between the two types of loans is that lenders usually ask for a security or collateral deposit when you choose to go for a secured business loan. While in the case of unsecured business loans, you don’t need to deposit any such collateral.
Likewise, there are other notable differences between the two types of loans, which you will find in the following section.
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1. Risks
Secured business loans provide a sense of security for the lenders. However, they tend to pose risks for the borrowers. For instance, if you borrow a secured loan and fail to repay it, you could lose that asset you have deposited as security.
2. Interest Rates
Depositing security or collateral for secured business loans means that you can get them at nominal interest rates. Moreover, the terms and conditions of such loans are much more favorable for the borrower. Lenders usually refrain from releasing higher amounts or lending at higher rates if they feel that you cannot return the money or if your credit score is low.
However, collateral eliminates many of these shortcomings, as lenders would be willing to let go of them due to the security that you deposit.
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Components of Business Loans
A business loan, just like most other types of loans, has two components: a principal and interest. The principal is the amount of money that you receive from the lender. And over time, a sum of interest gets accrued on this principal amount. So, when you repay the loan, you pay the principal amount and the interest accrued during the time you kept or used the money.
The interest has a prominent role in repaying business loans because it helps the lender fund the loan and lets them know the total amount of money you would repay.
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Tax Benefits of Business Loans
Availing business loans helps you meet your short-term or long-term financial requirements and save on taxes. So, you get to enjoy a host of tax savings and benefits when you repay the loan. The various tax deductions that you get from borrowing money for business purposes are as follows:
1. Tax-Deductible Interest
As discussed earlier, a business loan, like most other types of loan, has both the principal and interest components. You can cut down on taxes on your business loan’s interest component by deducting the amount from your gross income. But do make sure that you have all the records in place to submit them when you repay the loan and claim tax benefits.
2. Tax-Deductible Expenses
Any expenses that you incur from running the business, which you deduct from the gross revenue or profits, are exempt from taxes. It would be best if you took care to deduct such expenses from your gross revenues or profits before estimating your tax liabilities.
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Exceptional Cases for Tax Benefits on Business Loans
While you can save on taxes for the interest on the business loans that you borrow and the expenses you incur for keeping the business afloat, there are various cases where such taxation rules don’t apply. So, you must know the exceptions before you borrow money. You will find those exceptions in the following section:
1. Refinancing of Loans
If you use a second or third loan that you have borrowed from the same lender to pay the first loan’s interests, you won’t be eligible for tax savings. However, you can still claim tax benefits for the interest accrued on the second or third loan.
2. Buying Another Business
If you decide to buy another business, then tax deductions apply to running that business. If not, then you won’t be able to get any tax benefits on your business loans.
3. EMI Repayment
If you choose to repay your business loan in the form of EMI, you cannot avail of any tax benefits.
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Other Benefits of Business Loans
Besides tax benefits, borrowing money to establish a business also has other advantages. For example, the amount that you borrow not only serves various business purposes but may also have flexible repayment options depending on the lender. Likewise, there are a host of other benefits of borrowing money to set up a business.
1. Customised Loans
Business loans are of many types. You can also customize them to suit your requirements.
2. Flexible Payment Options
Many lenders, including several non-banking financial institutions, also offer flexible payment options for business loans. Such payment options make it easier for you to get reimbursements on the loans.
3. Benefits for Startups
If you are looking to establish a startup organization or business, you can get different types of business loans to save taxes. You should also know that startups are entirely exempt from taxes for up to three years when they borrow certain types of business loans.
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Final Thoughts
Various taxation rules apply when it comes to getting loans for starting a business. If you want to establish a business or startup organization of your own and are looking to get loans for the purpose, you should know the tax and other benefits you can get from it. Make sure that you do your research before you borrow money to begin with your business.
In that way, you will know the different types of business loans you can get and see whether they are exempt from taxes.
