Debt or Equity Financing: Which Is Better?

To raise funds for the needs of companies and enterprises, there are two types of financing options available: equity financing and debt financing. Not sure which is right for you? Dive in below.

What is debt financing?

Debt financing usually takes the form of a fund. The fund can be provided by a commercial funding company, a bank, a friend, or a relative. The most important thing about debt financing is that the lender acts as a single tax year proposal, which must be paid by the agreed deadline with interest. After you pay back the debt, the connection with the lender ends. The drawback of debt financing is that you have to pay off the debt full with the interest. It could also negatively affect your credit score.

Debt financing pros:

1. Business funds allow you to control how the extra capital is spent. Some lenders impose some limitations, but for the most part, what you are funding is entirely up to you.
2. A business fund is not going to be a long-lasting impact on how your business is going to work, with the exception of the fund that you need.
3. It’s a flexible category with many different types of business loans, the range of money you can get, and how long you have to pay it back.

Cons of debt financing

1. You have to pay the money to get it.
2. Depending on your credit score and other financial results, it can be hard for you to get the loan you want.
3. If you are not able to pay back the loan, your company's assets can be seized by the lender.

What is equity financing?

Equity financing is investing money in your business in return for a share of the ownership. Equity financing comes from a person, or an angel investor, a friend or a family member, or by selling shares, companies, or investors. There are also institutional forms of equity financing, such as venture capital funds. Venture capital funds combine both managing the money of a rich investor and investing in high-growth companies. The proportion of funding is usually by those who invest in a young ,but promising company in exchange for ownership. These investors make a profit out and are open to public and/or private.

Pros of equity financing

1. You do not have to pay the interest on the capital, so there’s no reason not to invest the profits into your business and pay off the debt, leaving more money to grow the business.
2. If you find the right investor, you can gain a great deal of experience, wisdom, industry connections, and much more.
3. If your business fails, you are not required to pay back the investment.

Cons of equity financing

1. It takes more time, especially when compared to some of the fastest funding options.
2. You are freely giving ownership of your business, and with that, decision-making power. You may need to discuss with investors, and you may disagree over the direction of your company. You might even be forced to abandon your own business.

The right solution for you when it comes to debt vs. equity financing may vary depending on your current needs and future plans. Often, the decision is made based on a variety of factors, such as the economic climate, existing capital structure of the company, current needs and your future plans.