Using Sinking Money to Be Debt Free!
We are back with a blog that is focused on the companies & organizations that have just begun their journey & would like to learn some core ideas to make sure that their entrepreneurial journey is never halted due to a roadblock! In this article, we’d talk about Sinking Funds & how your organization can use them effectively to make sure that your company stays debt-free for life!
What is a Sinking Fund?
A type of fund that you create for the sole purpose of repaying debt. In simpler terms, it is a fund that is established over a period of time to fund a future expense or repayment of long-term debts.
The Reason Why Sinking Funds Exist
Future expenses can be planned, however regardless of how much planning is done, sometimes a future expense that needs to be urgently cleared pops up out of the blue, which is why having a Sinking Fund to repay debts explicitly is quite beneficial in the long term.
Let’s take a simple analogy, a school that wants to culminate the school year with a trip to the popular zoo in town will actually create a sinking fund that will grow to the desired amount throughout the year and eventually cover up the trip expenses. In this way, the students do not take out extra money as throughout the year they were already contributing towards the sinking fund.
Advantages of Sinking Funds
- Attracts The Investors: Investors always consider companies & organizations that owe a large amount of debt to be risky! Once the investors are made aware of an established sinking fund, they take it as a positive and see it as a protective lawyer for them in case of a default of bankruptcy.
- Lower Interest Rates: Companies that have poor credit ratings often attract investors by offering higher interest rates. An established sinking fund enables your company to offer lower interest rates!
- Stability: Economic situation of any company is never definite. Financial issues can often shake a company to the core. When you have a sinking fund, your ability to pay the debts and buy back the bonds is always there!
Let’s take an example to demonstrate how these advantages come into play in the broader scope of things.
A company issues 5,00.000 INR worth of bonds with a sinking fund provision and establishes a sinking fund wherein 5000 INR is regularly deposited with the sole intent of using this to buy back bonds before they mature.
Sinking Fund vs Emergency Fund
The difference is that an emergency fund is always established for something unexpected, while a sinking fund is formed for a well-defined cause.
Sinking funds are super easy to set up, many companies fail to create one as they lack the discipline to set aside a specific amount regularly. The team at Incomet suggests that you try to make that discipline a fundamental part of your entrepreneurial journey! That’s it for this blog, see you next week!