Debt Financing of a Wholesale Business
Whenever talking about business matters one can never forget debt financing. Now a days it has become part of many companies or you can say the whole world is running on debt finance. Wholesale business requires a lot of capital money to just start the business because a wholesaler has to stock different kinds of products in bulk quantity in warehouse. Debt financing actually means to get loans from a number of sources such as banks, government agencies, etc.
Studies show that roughly 50 percent of wholesale enterprises depend on financing for expenses such as buying ware house space, products, equipment and other assets. The main characteristics of a loan include mandatory return of a fixed rate of interest on the principal amount. Wholesalers get debts from banks and other companies dedicated for this reason and buy products from manufacturers. Wholesalers also get products directly from manufacturers on debt. While on other hand retailers also do the same thing to buy products from wholesalers.
Kinds of Debt Financing
There are two kinds of debt financing; short term and long term. In short term financing you will return the capital money with interest within one year. It is usually needed for the day-to-day operations of a wholesale business, such as purchasing supplies, inventory, or paying the salaries of employees. In long term financing the loan is taken for more than a year. It is usually used for buying business assets such as equipment, buildings, land, warehouse or machinery.
Advantages of Debt Financing
There are various advantages of debt financing like when you are taking debt then you are master of your own fate and you are in full control and don’t have to share profits with any investors and partners. When investors and partners are involved in your business then for sure they are also part of your business and can ask you questions about your way of running business.
There are many firms who are giving loans to wholesalers and other companies on competitive rates so there are wide opportunities for wholesalers to get loans on the terms which suit them. The other big advantage of debt financing is that you don’t have to pay tax on the money taken which ultimately reduces your liability of paying tax every year.
Disadvantages of Debt Financing
On other hand there are many disadvantages of borrowing money in wholesale business. In many cases, the wholesaler is under heavy debt already when he needs new funds. Obviously not making the loan payments will ruin the debtor credit ratings and make borrowing from the creditor in the future difficult or impossible and in business reputation is the only thing which makes you survive in the market. Many banks and other agencies require you to provide some kind of security to obtain the loan successfully. Sometimes many business men end up confiscating their whole properties. Besides there can be a possibility of legal action against debtor at any time. In short we can say when ever a person is getting debt he is going to run his business at risk of bankruptcy.