6 Lessons Learned: Finances

The Advantages of Debt Equity Financing

You may need to look for additional financing at specific stages of your business growth. Most businesses are strapped for cash during the initial stages of their growth. However, finding money is not easy. Over the years, lending conditions have become tighter and investors are not pumping in as more money as before into small businesses.

Small businesses can take advantage of different types of financing options. The most common ones are equity financing and debt financing. To know which financing option would be suitable for you, it’s important to know their difference.

What is Debt Financing?
With debt financing, you are simply given a loan and have to pay it back with interest. Some common examples of debt financing include using a credit card, buying a car or buying a home. No matter where you get the financing from, be it a bank or from family members, you will be charged an interest.

Most small business owners go for debt financing due to its various advantages. To begin, the lender has no control of your business. When you pay back the loan, you will no longer have any obligation to the financer. The interest charged on the loan is also tax deductible, which is an advantage for you. Finally, you will have to pay back the loan in regular installments. Planning for your expenses over time becomes easy when you have regular payments to make.

Overview of Equity Finaning
Equity financing is not well understood as much as debt financing is. Equity financing mostly involves investors and this is why most people don’t understand it. Venture capitalists and angel investors will require part of your company to give you the funds you need.

With equity financing, the investor takes all the risk of the business. On your side, you will not be liable to pay any money back in case the business fails. Apart from this, since you will not be having any loans to pay, you will be left with more money at your disposal. Finally, venture capitalist can provide you with advice and a platform to launch your business globally.

Which Funding Option is Ideal for You?
In most cases, you will not have a choice when it comes to funding. It is not easy to get traditional financing when you are running a small business. On the flip side, unless your business has the potential for a global reach, getting venture capital will be nearly impossible. If you would like to get funded by angel investors, you will have to give up a significant stake of your business.

The above is an overview of how debt and equity financing work.

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