As you may know, starting a business is not an easy endeavor, and your first concern might be financial.
Businesses need money in order to invest in facilities, research, technology, hiring, and more. Once as they build a solid foundation, profits will start to flow, but this takes time. If you want to grow your business or extend your services, you’ll need capital. A company can raise capital in two ways: through equity financing or debt financing. In this guide, we’ll discuss the differences between both and help you decide which route to choose.
What is Debt Financing?
With this traditional approach to financing, companies borrow money and pay it back later, including interest. Debt financing does involve restrictions, but it also comes with a wide range of benefits. Typically, this type of financing is done through bonds, loans, and lines of credit.
The Pros of Debt Financing
Maintain control of your business. With debt financing, you don’t have to surrender any control. For businesses just getting started, this factor can be extremely crucial. After all, you want to protect your vision. Investors with control over your business can make decisions and alter brand values. If this isn’t something you want to risk, debt financing may be the better choice.
Interest is tax-deductible. At first, the idea of going into debt with interest added into the mix can be overwhelming. However, keep in mind that this interest is tax-deductible. Having this benefit can make filing your taxes a lot easier.
Plan for the future easily. Once you know what you’ll owe monthly, you can create a budget that works for you. With debt financing, you can know exactly what your financing schedule will look like.
The Cons of Debt Financing
Debt is debt. Like it or not, any form of debt is not ideal. For small businesses, the debt of any kind can also be risky. If your business isn’t as successful as you expected, you’ll still have to pay back what you owe.
You’ll have to make payments right away. Unlike equity financing, you’ll have to start making payments almost immediately. Again, if you don’t have much cash on-hand to work with, this can be problematic.
Monthly payments can limit cash flow. Over time, profits ebb and flow. All businesses experience slow periods, and during that time you’ll have to rely on your current assets. Monthly debt financing payments can greatly impact your affairs.
Debt Financing Sources
You may be wondering what specific types of debt financing you can pursue. To grow your company via debt financing, consider the following options:
- SBA loans
- Business loans and lines of credit
- Loans from family members, friends, and colleagues
- Credit cards
- Peer-to-peer lending
- Invoice factoring
- Term loans
- Equipment loans and leases
What is Equity Financing?
Equity financing takes a more unconventional approach to raise capital. Rather than borrowing money and paying it back later, you can sell part of your company to investors. As a result, investors gain control and ownership over your business. Of course, the first step in the process is to find investors who believe in your vision. Typically, you’ll meet with them to present your business plan and current assets. From there, investors can visit your headquarters to verify that the promises you make are genuine. If they decide to invest, they’ll buy into your business.
The Pros of Equity Financing
Great for small businesses. Small businesses may not have access to a lot of capital when they’re first starting out. Equity financing gives them the chance to partner with affluent investors and venture capital firms.
No repayment or interest. One of the biggest advantages of this type of financing is that you won’t have to worry about repaying loans. When investors buy in, they receive management power in return. Therefore, you won’t be obliged to owe them later on.
Extra hands on deck. When investors believe in your business plan, they can come on board and improve it. More than likely, they have the experience that you’ll find useful. Why not take advantage of extra support? Having additional input can pay off in the long run.
The Cons of Equity Financing
Loss of control. There’s no way to get around it; with equity financing, you’ll have to surrender some control over your company. In some cases, this may not be a positive experience.
Investor demands may change. Handling investor relationships can be tough, especially for newcomers. As your business grows, investors may request changes you didn’t expect. They could be changes you aren’t comfortable with as well. It’s best to be prepared for this prior to choosing this path.
Influencing investors can be difficult. Before you can even think about receiving financing, you have to convince investors. This means creating a rock-solid business plan. As a business owner, you also have to be ready to answer challenging questions that may come your way.
Division of profits. When your company begins to flourish and profits roll in, you’ll have to give a percentage to your investors. This is one aspect of equity financing that some companies would prefer to avoid.
Equity Financing Sources
There are many varieties of equity financing you can employ. Here are a few ways you can grow your company with the help of equity financing:
- Corporate investors
- Crowdfunding
- VCIs (Venture Capital Investors/Firms)
- Through Listing on IPOs (Initial Public Offering)
For more information on funding your business, contact Platform Funding and get started with three simple steps. First, you’ll fill out a secure application on our website and submit your last 3 months of business bank statements. Next, you’ll be paired with a business funding specialist who can assess your needs and customize a plan that works for your business’ budget. Finally, you’ll receive the capital you need and begin repayment. Our professionals are on-hand to assist you with any questions or concerns you may have along the way. Call us at (866)-473-1455 or visit our Get Funded page to apply today! We can’t wait to help you succeed.
Sources
2. https://corporatefinanceinstitute.com/resources/knowledge/finance/debt-vs-equity/
3. https://www.businessinsider.com/personal-finance/debt-financing-vs-equity-financing