Though businessmen might be rich and have a lot of cash lying around, they might still prefer taking loans to buy a business. That is because getting a loan is quick and efficient, gives you tax deductions and allows you to invest your working capital elsewhere.
So, Elon Musk finally bought Twitter for $44 billion and if you look at how this deal was financed, here's what the breakup seems to be like as per Al Jazeera :
But, when Elon Musk is so rich, why does he have to take loans?
Well, entrepreneurs can acquire a company in multiple ways: They can always buy out a company in cash, opt for stock swaps, go for debt or equity financing or use earn-outs to pay for the company. Companies have to look for factors like profitability, share price, earnings, integration costs, quality of assets, and off-balance-sheet risks to choose the right financing technique to acquire another company. But when they opt for a loan, there seem to be a lot of benefits:
1. Quick turnaround time: Leaders like Elon Musk save a lot of time by using bank financing to their advantage as it can be quick and more efficient than the process of trying to raise enough capital themselves.
2. Deductions: Interest payments on debt are usually allowed to be deducted from profits to a certain extent. Thus companies can use funds from banks and enjoy tax benefits along with growing their existing business.
3. Don't have to put in your own money: Why would anyone block their own working capital when they buy a business, especially when it requires a large chunk of money to be invested? You could save your own money and use it elsewhere while using the bank's money to fund your business expansion.