Leveraging Debt to Build your Business

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'Never Get into Debt!!" is a mantra that has been drummed into the ears of many a young entrepreneur. This has been reinforced by popular media, which shows the possible

negative outcomes of getting into debt. The implication is that the role of debt in the capital structure of a business has been greatly under estimated, with many people viewing debt as an undesirable or necessary evil.

A survey of Nigerian businesses revealed that entrepreneurs prefer to rely on internal cash flow or injections of funds by third parties such as family and friends.

Debt can present immense tax benefits to the business, especially when the debt is properly structured and managed, In Nigeria, The Companies Income Tax Act allows limited liability companies to deduct any debt capital and interest payable thereon from their net profits for a few years. To maximise the benefits of Debt/Leverage in Nigeria, follow these steps:

1. Incorporate your business: The tax benefits on debt mostly apply to incorporated businesses.

2. Structure non-equity investment as debt: Many entrepreneurs pour money into their business without structuring their investment properly. Engage a skilled lawyer to prepare an investment between yourself and your company. Alternatively, your company could issue debentures to you and pay interest on those debentures, thereby making you a creditor to your company. This provides you with a source of tax deductions.

3. Keep your personal funds separate from business funds, and maintain records of all transactions between yourself and the company. This protects your position in the event of an audit.

4. Buy machinery and equipment on hire purchase. This helps you break your costs into manageable chunks

If you can effectively follow the above steps, your chances of maximiszing the tax benefits of leverage will improve substantially.

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