In the world of business, the phrase “it takes money to make money” rings true. However, many successful businessmen choose not to tie up their personal funds in their ventures. Instead, they opt for loans. Why? This strategy allows them to save their money and invest in other profitable avenues like shares. Let’s dive into this concept and explore an Indian business example that illustrates this approach perfectly.

The Logic Behind Using Loans for Business

Using loans to run a business, rather than personal funds, might seem counterintuitive at first. However, there are several compelling reasons why this practice is popular among savvy entrepreneurs:

1. Leverage and Growth: Loans allow businesses to leverage other people’s money to grow faster. By taking a loan, businessmen can access substantial capital without depleting their savings. This enables them to scale operations, invest in technology, or expand their market reach quickly.
2. Risk Management: Utilizing personal funds ties your financial future to the success or failure of your business. By using loans, entrepreneurs can spread their risk. If the business encounters difficulties, their personal savings remain intact, safeguarding their financial security.
3. Opportunity Cost: By preserving their personal funds, businessmen can invest in other opportunities, such as stocks, real estate, or new startups. This diversification can yield higher returns and provides a financial safety net.
4. Tax Benefits: In many countries, including India, the interest paid on business loans is tax-deductible. This reduces the overall tax burden on the business, making loans a more attractive option.

The Truth About How Thinking Rich/Poor Shapes life

The Strategy in Action: Reliance Industries

Let’s take a closer look at an example from India to illustrate this strategy. Reliance Industries, led by Mukesh Ambani, is one of India’s largest and most diversified conglomerates. Ambani’s approach to financing provides a textbook case of why businessmen prefer loans over using their own money.

Reliance Jio: A Game-Changer Funded by Debt

When Reliance Industries launched its telecom arm, Reliance Jio, in 2016, it shook up the Indian telecommunications industry. The project required massive investments in infrastructure, technology, and marketing. Instead of using the company’s profits or Ambani’s personal wealth, Reliance Jio was primarily funded through loans and other forms of debt.

Here’s how this approach benefited Reliance and Ambani:

1. Preservation of Capital: By using debt to finance Jio, Reliance could preserve its existing cash reserves. This capital could then be invested in other ventures or used to support other parts of the business.
2. Aggressive Expansion: The substantial funds from loans allowed Jio to aggressively roll out its services nationwide, disrupting the market and quickly gaining a significant customer base.
3. Tax Efficiency: The interest payments on the loans used to finance Jio were tax-deductible, reducing the effective cost of borrowing and enhancing the overall profitability of the project.
4. Risk Distribution: By financing Jio through loans, Reliance managed to spread the financial risk. If the venture had failed, the losses would not have impacted the personal wealth of the Ambani family to the same extent.

It’s Here Time to Buy Your Dream House in India

Investing Saved Capital in Shares

While using loans to finance business operations, many entrepreneurs, including those at Reliance, invest their personal funds in other opportunities like shares. Here’s why this strategy works:

1. Diversification: Investing in shares allows businessmen to diversify their investments, reducing the risk associated with having all their funds tied up in one venture.
2. Higher Returns: Historically, stock markets tend to provide higher returns compared to savings accounts or other low-risk investments. By investing in shares, businessmen can grow their wealth while their business is funded through loans.
3. Liquidity: Shares are relatively liquid investments compared to real estate or other business investments. This liquidity provides a financial cushion that can be accessed quickly if needed.

It’s here Power of Compound Interest have know.

Conclusion: The Smart Play for Modern Entrepreneurs

In summary, using loans to fund business operations while investing personal funds in other avenues like shares is a strategic move embraced by many successful businessmen. This approach leverages the benefits of debt, preserves personal wealth, and allows for diversified investments, ultimately leading to greater financial stability and growth.

Reliance Industries and its handling of Reliance Jio serve as a prime example of this strategy in action. By funding Jio through debt, Mukesh Ambani was able to revolutionize the Indian telecom industry without jeopardizing his or the company’s financial security.