To raise funds for the needs of companies and enterprises, first of all, there are two types of financing options available: equity financing and debt financing. Most companies use a combination of debt and equity financing, but it also has its obvious advantages. The most important of these is that equity financing has no repayment obligations provides additional working capital that can be used for business development. Debt vs equity financing, what to choose for your business and why? A simple answer to this? The decision is made based on a variety of factors, such as the economic climate, the existing capital structure of the company, current needs and your future plans.
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. Business credit cards and business lines of credit and various types of debt financing. The most important thing about debt financing is that in this case, 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. In addition, it may negatively affect your credit score.
Pros of debt financing
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. Debt financing is a flexible category. Many different types of business loans, has a wide range of the position of the mechanism, the amount of money you can get, and for how long will we have to make the payment.
Cons of debt financing
1. You have to pay the money to get it. Despite the fact that the plan is appropriate for you to borrow, it will probably help you get more done.
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 to invest 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 the 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 invest in high-growth companies. The proportion of funding is usually the investors who invest in a young but promising company in exchange for ownership of the company. These investors make a profit out of the company they invest in, 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 is no reason not to invest the profits into your business, to pay off the debt. This means that there is more money to grow the business.
2. If you find the right investor then you are able to 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 while examining debt vs equity financing may vary depending on your current needs and future plans. In general, taking debt financing is almost always a very good step than giving equity in the business. By providing equity, you will be losing some, or all, of the controls in your business. In order to attract investors, you can complicate the decision-making process in the future.
On the other hand, it will take over the debt in the short term that will give you control of the business until you fully repay the debt and the interest rate.