Debt Financing vs. Equity Financing: Which is Best for Your Business?

Small business owners typically have two basic financing options: debt financing and equity financing.

Debt financing refers to borrowing money, often through a financial institution. small business loansEquity financing is when you get money from investors in exchange for part ownership in a company.

Both options bring cash to your business, but each has its pros and cons. bond finance It gives you complete control over your business, but it can be costly, especially if you have poor credit or haven't been in business for long. Equity Financing It's an option for startups or companies that don't yet have revenue, but it requires transferring shares of the company to investors who want to influence business decisions.

The best financing for your business is one that supports your company's current and future goals and financial needs.

Getting a business loan isn't always easy, especially startup in need of financing. Lenders often require things like a certain amount of time in business, solid credit, and a strong financial position. Collateral typeIf you meet these requirements, you may be able to get a competitive interest rate.

Loans can be a good economic tool for your business if the purpose of the loan is intentional and the expected return is greater than the total interest paid. Another benefit: When you pay off your debt, build business creditrates and returns may improve in the future.

If you pledge collateral, you may lose your assets if you are unable to repay your debt. Even if the debt is unsecured, your credit score is at risk and, if the lender demands it, your property, such as your home or car, may also be at risk. personal guarantee.

Debt financing can have greater long-term economic benefits than equity financing. In the case of equity financing, the investor is entitled to a profit, and if the company is sold, the investor can also receive a portion of the profit. This reduces the amount of money you can earn from owning the company outright.

Equity financing can be less risky than debt financing because there is no loan or collateral to repay. Debt also requires periodic payments, which can adversely affect a company's cash flow and ability to grow.

If you can't qualify for a startup business loan and want to avoid more expensive options like credit cards, you may need equity financing. Because your business is still young, make sure the investment is a fair valuation.

Investors can provide working capital to establish your company. However, their industry knowledge and experience can prove valuable as well, especially if they play an active role in the growth and success of your business.

Investors who own a sufficient amount of stock have voting rights and can advocate for actions such as electing new directors. Eventually he could lose complete control of the company if he relinquishes more than 50% ownership. To get it back, it would need to buy out investors, which could be expensive.

• term loan The borrowing limit can be higher, so it could be a good choice if you're looking to expand your business and want to ensure good credit and high returns.

• business credit line We offer a flexible way to meet short-term financial needs, such as when you need to purchase inventory or repair broken equipment.

• personal loans for business For new businesses who want to preserve their equity, this is an option, but the fees depend on your credit score and can be expensive.

• Corporate credit card It helps cover ongoing expenses, but may be necessary for start-ups who can’t get financing.

Below are some small business financing options that allow you to rely on your own capital.

• venture capital It may be provided by individuals or companies who invest from a pool of funds. VCs are more likely to provide financing to established companies than startups, and often require board members and capital.

• angel investor Private investors are people who use their own funds to lend to businesses. They typically invest in profitable startups, so they are more likely to take risks if they expect a return.

• Equity Crowdfunding It is the process of raising money from a “crowd” or group of investors. This can be a good option for small businesses or companies wary of pitching directly to angel investors or venture capitalists. Investors can view and select businesses to support directly through her crowdfunding platform online.

• family and friends. Negotiating with venture capital and angel investors can be difficult, but getting investment is even more difficult. You may be better off getting equity financing from family or friends. But losing their funds could put the relationship at risk.