A good cash position is where total assets are more significant than liabilities. A good cash position allows you to use your help to improve your business or for personal reasons. There may be other reasons for taking out loans when it is not necessary, but if you have a cash surplus, that is generally not a wrong choice. You can look at this in terms of short-term loans with low-interest rates, and you should be cautious that the money will come back in time.
Advantages Of a Good Cash Position
1. Operating Capital
A good cash position will allow you to operate without having to borrow. You can purchase equipment or additional employees if you use your available cash. You should review a loan agreement thoroughly when considering taking out a loan and the total cost if you choose to get money.
2. Capital Gains
Buying an investment property with a mortgage is one of the many ways business owners can enjoy capital gains on their investment property. Capital gains are the extra profits that are made on an investment property. Many business owners buy investment properties to make capital gains. If you sell your investment property, you can use that money to pay off your mortgage.
3. Tax Savings
Any profits earned when a business owner sells their property can be used to reduce your taxable income. You are no longer required to pay taxes on any previous income; now, you only have taxable income when the net profit is added to your adjusted gross income for 2014-2015. If you have a high income or make a lot of capital gains, you will be taxed at a higher rate. You may also be required to pay state taxes as well. The tax rate can be reduced significantly if you have a good cash position and use it to purchase an investment property.
4. Capital Gains Are Taxed Dividends
Many business owners prefer to buy an investment property with a low mortgage and make high capital gains instead of dividends. It can provide much-unexpected income. If a company pays dividends, the interest is usually high, and the stock will be valued much lower. The total profit or gain is taxed at ordinary income tax rates when the store goes up in value. For example, if you purchase 100 shares of stock for $100, that increase by 2 percent per year. Your gain would be $200 after one year, and your taxable rate would be 25%. You also paid tax on $100 of dividends at ordinary tax rates, so your final gain would only be $130.
5. You Can Avoid Capital Gains Tax
The IRS will tax you on your capital gains if you sell your business. You can avoid capital gains tax by taking out a loan and using it to buy another property. If you are purchasing a new commercial building or storefront, this can increase the value of your business. Your other investment properties can also increase in value, so you will be able to use them as collateral for loans in the future if needed. Because they also increased in value, there will not be much taxable income. The interest rates on loans may be higher than the rate of dividends, but it is more advantageous if you have a good cash position.
6. A Good Cash Position Improves Your Credit Score
When you have a good cash position, it will improve your credit score. Having more available credit means you can borrow more money from other lenders to expand your company or buy another investment property. With a good track record, banks and other financial institutions may be willing to give you bigger loans with lower interest rates. Having a good cash position means you can borrow money when needed and still maintain a high credit score.
7. A Good Cash Position Improves Your Lending Status
The bank will also look at your total assets and liabilities when you take out a loan. You will have a higher lending status if your total assets are more significant than your total liabilities. If you have enough money to pay all your debts, the bank will be more likely to give you a loan if something happens and you need to borrow money. Banks generally do not like how high debt ratios are, and they would prefer if there is less debt. Having a good cash position means that they know that you can pay off any debts quickly.
A good cash position will improve your finances and is an excellent way to protect your assets. You can borrow money at lower interest rates if you have a good cash position, and you should look at business loans before taking out other types of loans. A good cash position will help you get more capital gains, tax savings, higher credit scores, higher lending status, and the ability to use operating capital for purchases. If you are thinking about taking out a loan or borrowing money from your investment property, consider the pros and cons so that you can pay it back on time.