Raising Money: Should Entrepreneurs Consider Debt or Equity Financing?

Deciding between equity financing and securing a small business loan is a challange for all small business owners.


As far as funding a startup is concerned, there are two fundamental ways to accomplish your goals — debt financing or equity financing.

Each caters to the needs, and long-term objectives, of an entrepreneur and needless to say, both have pros and cons. This makes it imperative, on a small business owner’s part, to learn about each option before making a choice.

 

Debt Financing – Are you comfortable with small business loans?

When referring to debt financing, it implies that you will fund your business through loans; either from a bank or some other financial institution. Moreover, you can get loans from so-called commercial finance companies, to use as seed capital to float your new venture.

However, in order to acquire a small business loan, you will have to come up with nothing less than a stellar credit and a sturdy financial background. Also if you want a large loan to be approved, then you will have to quote proper collateral, for example, your company and other assets you may own.

Many budding entrepreneurs are averse to taking on debt to start a business. Mainly because they are skeptical about their ability to repay loans on time, in case of an intermittent cash flow that may plague their company sometime down the road. While there are other entrepreneurs who aren’t confident regarding their creditworthiness so, they don’t even bother submitting a small business loan application.

Still, everything’s not amiss with debt financing. There are some advantages. For instance debt financing:

  • Gives you full control over your business. Ownership rights will remain with you, unless you default on your business loan terms. Then your lender will ask for collateral as a security against the loan. If you fail to repay the loan, as per the agreement, then you may lose tangible assets.
  • Enables you to build business credit, which can benefit your company in the long-run, especially when you need access to more capital in the future as well affordable business insurance coverage.

Apart from these considerations, keep in mind that interest paid toward small business loans are tax-deductible, thus easing the pressure on limited financial resources.

 

Equity Financing – Will you share small business ownership?

In the case of equity financing, investors will fund your business in return for a share of ownership. Investors then reap profits when your business becomes successful or has an exit event.

However, in the event your company fails (and doesn’t make any profit) you are not obligated to repay the money owed to investors — in most cases. Additionally, you won’t have to worry about monthly debt repayments impacting much needed cash flow.

Furthermore, many entrepreneurs choose equity financing to finance their startups because personal credit history is often not a barrier to investment. Instead, funding is secured on the basis of a company’s business prospects — its power to generate revenue.

Equity financing enables investors to share profits and, often times, have a say on your day-to-day operations. Many entrepreneurs may not see this as a threat due to cash needs, but it can become a major contention down the road. Alternatively, strong investment partners can become an added advantage for your company’s growth prospects.

Deciding between equity financing and securing a small business loan is a challange for all small business owners. Start first, by understanding the advantages and disadvantages of each option to determine which type of financing is best for your small business.

 

Savion Sage is a financial writer, writing on behalf of the Oak View Law Group. He writes on a wide variety of financial topics, but keeps his focus mainly on debt and other related issues. Apart from that, Sage is quite active in various social media platforms. For issues related to your personal financial well-being connect via Twitter.

 

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