UNLESS YOU have an empire of wealth that allows you to bootstrap your own business, you mostly have two options if you want to finance a business: equity financing or debt financing.
To give you a basic idea of these options, debt financing is when you incur debt from a financial institution like a traditional bank or a lender for financing. On the other hand, equity financing involves looking for investors and enticing them to invest in your business with financing in exchange for equity, which means they’ll own a percentage of your business.
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These options are very enticing for someone looking to build a startup, but the question is: which is better among these two? Let’s find out.
Equity Financing
Let’s start with equity financing. Equity financing involves selling a portion of your company in exchange for funding. For example, you’re building an ABC company but are short on money. You can then decide to sell 10% of your company to an investor in exchange for a cash flow. You’ll then get the funding, and now, the investor owns 10% of your company.
The main benefit of equity financing is that you are not obligated to pay off the investor’s funding. Because of this, equity financing places no financial burden on the company since you don’t have to repay anything from the investor, giving you more room to put your finances towards improving your business. However, that doesn’t mean that equity financing has no downsides.
In reality, the downside of equity financing is quite significant. To gain funding from your investors, you must give up some equity in your company. This, alone, entails a lot. Some examples are that you’ll also have to share your profit with your investors, include them in company decisions, or consult them for literally everything. The only way to remove them from your company is to buy their equity, which is leagues more expensive than the original price of the equity they gave you.
And that’s not all, as before you can even get an investor, you have to ensure they agree to your business proposal. Finding an investor is hard, especially when looking for one in your industry. Most investors are looking for technology-driven businesses, and if your company isn’t one, it might take a long time for you to find one. And, of course, there’s the matter of whether they will accept your proposal or not.
Debt Financing
On the other hand, there’s debt financing. Debt financing involves applying for funding from a financial institution and paying the money back with interest. The most common method of debt financing is taking on debt, or more specifically, a business loan.
Usually, you have to apply for one, and you must meet many requirements. Creditors usually look favorably on businesses with low debt-to-equity ratios. With a lot of debt-to-equity ratio, you’ll most likely be approved for a business loan you’re currently applying for.
The advantage of debt financing is numerous. For example, the lender would have no control over your business since all that would matter is that you repay the loan. The transaction will end once you repay the loan in full and on time. Also, the interest you’ll pay on the entire loan would be tax-deductible.
Of course, there are a few downsides to debt financing. This would include another financial burden for your business. Another would be if your business is not looking good, especially in terms of profit, you’ll still be required to pay off the loan, and if you’re late in your repayments, you’ll be hit with penalties, adding more to your financial burdens.
So Which of Them Should You Choose?
Your choice should depend on a few factors in your business. For example, if you’re a startup and think your business will boom quickly, and if the business is related to tech, you should look for investors. If you’re confident that your proposal will be approved, that’s all the more reason to look for investors.
That said, if you’ve already established your business but are looking for some support on your cash flow, the optimal choice would be debt financing. A poor cash flow is easier to manage if you get loans, like the CreditNinja quick cash loans. However, you should always remember that you’ll be paying that soon.
Debt financing is usually good for seasonal businesses like Christmas items manufacturers or hotel chains. It’s also good to remember that the repayment is different for each creditor. If you’re looking for one, Creditninja explains debt and everything you need to know about getting one.
Final Words
Debt and equity financing are both good options if you’re looking for business financing. However, they are more tailored to specific circumstances, so you should always check which is better for your business in your current situation. They have pros and cons, so you should check which would fit your financial circumstances.
