NOMSA NKANA, Lusaka
INVESTRUST Bank managing director Simangolwa Shakalima has urged the private sector to consider debt financing in their quest to optimise their businesses.
Mr Shakalima, however, said there is need for proper use of debt financing, which is a term used when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual or institutional investors, in order to realise benefits.
“Proper use of debt financing has immense benefits to businesses. The main advantage of debt financing over equity financing is that the lender does not take an equity position in the business as the business owner retains full ownership and the lender has no control over the running of the business,” he said in a presentation during a breakfast meeting on debt management and credit culture in Zambia recently.
He outlined some of the benefits as that the interest on the debt could be deducted on the company’s tax return, lowering the actual cost of the loan to the company.
In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.
Mr Shakalima said there is also the potential for enhanced return on assets if debt financing is properly used.
“If the company could borrow at a rate that, after tax, is lower than the return of the financed asset, then it would be very prudent to do so,” he said.
Mr Shakalima said in comparison to equity financing, the exception being when the business is approaching bankruptcy or very high levels of debt, debt financing almost always costs substantially less than equity financing.
“On the other hand, with equity financing, the investors become part owners of the company and, therefore, have a say in how the business is managed.
“Debt interest costs are fully tax-deductible as a business expense and in the case of long-term financing, the repayment period can be extended over many years, reducing the monthly expense,” he said.