All You Need to Know About Business Loans and the Taxes Associated With Them

Many of you dream of starting a business, and so to get a start, many opt for a business loan.

Even those already running a business may need a business loan to expand and take it further. There are many options of financial institutions that provide business loans like a bank or even an NBFC. There is also the availability of a private money lender, although this is not an advisable option for a business loan.

Firstly, one must identify the need for that business loan. Once that is properly sorted out, you can go ahead and decide on a suitable business loan. However, before doing so, there are many things that one should be aware of, and so let us look at the nitty-gritty related to a business loan.

What are the Different Types of Business Loans that You Can Go For?

Business loans are mainly of 2 types:

• Secured Business loan:  As the name suggests, since it is of a secure form to avail this loan, you need to provide some sort of collateral.

• Unsecured Business loan: This sort of business loan does not require you to furnish any form of collateral though the trade-off is a higher business loan interest rate.

Two factors that affect these two types of business roles are:

• The risk involved: Secured loans give a sense of security; however, if you fail to repay, then you may lose the collateral.

• Interest rates are also affected: If you can furnish any type of collateral, then the institution is willing to lend higher amounts with lower interest rates. So in unsecured loans, you will get only lower amounts and that too at a high business loan interest rate.

Which Components Make up a Business Loan? What do We Need to look at Exactly?

Just as in any other type of loan, a business loan is also made of 2 components:

• Principal: This is the money from the lender, whether bank or NBFC, as a loan.

• Interest: Over time, as days go by, the principal accrues some interest that you need to pay from time to time according to your payment schedule. 

Do Business Loans Have Provisions in the Form of Tax Benefit?

Yes, most definitely, when you apply for a business loan, you can also get various tax benefits in its lieu. While repaying the loan, several provisions help in reducing taxes. The two major types of tax benefits that a business loan accords to you are:

• The tax-deductible interest: As discussed, the business loan consists of the principal and the interest, where the interest is beneficial in reducing taxes. You can simply deduct this amount from the gross income and decrease the tax you have to pay in the end.

• The tax-deductible expenses: All sorts of expenses that you will incur while operating the business can be easily deduced from the gross income and save taxes. Hence a combination of the two can lead to better tax-reducing alternatives.

What are Some of the Unique Scenarios that Negate Tax Benefits on Any Business Loan?

The interest you pay can be easily deduced from the gross income and will reduce the tax you pay, but there are exceptions. There are specific scenarios where the business loan you acquire will not be eligible for tax benefits. Let us look at some situations where you will not get a tax benefit from your business loan: 

• Refinancing loans: Suppose you take a loan from a lender and take another loan from the same lender to repay the earlier you cannot avail tax benefits of the first loan. You will gain tax benefits from the next loan you have taken to pay off the first.

• Buying a business: Suppose you want to buy out a business here too tax deductions apply to running a business, and if not, then there will be no tax benefit on the business loans.

• Repayment in the form of EMI: If you choose to repay the said business loan in the form of EMI, then all tax benefits stand cancelled immediately.

Some other uses and points of business loans:

• Customised options: Business loans are quite flexible and customisable according to the person seeking approval.

• The multitude of payment options: There is a lot of flexibility offered by lenders when it comes to business loans, and so one can get reimbursements on these loans quite quickly.

• Startups gain a lot: If you plan to start something new, then business loans given to you will also come with many tax saving options.

So there, you have a comprehensive study of several aspects related to a business loan. Now set your priorities and get the beneficial business loan today!