Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

What financing option do business owners often choose because it is a fixed expense and interest is tax-deductible?

1. Equity financing

2. Debt financing

3. Venture capital

4. Angel investing

The correct answer is: Debt financing

Debt financing is a common choice for business owners primarily because it offers the benefit of fixed repayment terms, providing predictable expenses for budgeting purposes. This type of financing involves borrowing capital that must be paid back, often with interest, and this interest is generally tax-deductible under current tax law. The deductibility of interest can significantly reduce the overall cost of borrowing and even enhance the cash flow management of a business. In contrast, equity financing requires business owners to sell a portion of their ownership in the company, which can lead to a dilution of control and profits, and does not provide the same tax benefits associated with interest payments. Venture capital and angel investing similarly involve giving up equity for financing, and while they can provide necessary funds, they do not afford the tax deductions that debt financing does. Thus, businesses often prefer debt financing when they aim for a stable financial structure while maximizing tax efficiency.