You know that it’s hard to acquire business capital as a small business owner. However, money is a vital factor in growing your business. Whether you plan to build a startup or acquire funds for business expansion, you will have two basic options – debt financing or equity financing. In this article, we will check out the difference between the two, so you can choose the best one for your company.
What is debt financing?
In a nutshell, debt financing is entering a relationship with a lender where you borrow money and promise to return it along with setting interest. In this case, you won’t be required to share any part of your business with anyone and will remain as the only owner. After paying off the debt to the lender, the relationship ends – plus, you get a positive credit score if you pay on time. As a viable example, a secured business line of credit is a type of debt financing that allows you to borrow money from a lender by providing collateral, such as business assets, while maintaining full ownership of your business. It offers flexibility in accessing funds and can help build a positive credit score when timely payments are made.
Benefits of Debt Financing
- Straightforward to acquire
- Ownership stays with you
- Temporary relationship with the lender
- The relationship ends with full loan repayment
- Easy to predict figures since loan payments never fluctuate.
Online lending. You can check online and very quickly get quotes from different lenders. Several platforms out there will offer quick feedback and a way to get an instant acceptance or rejection from these lenders.
Disadvantages of the debt financing
- Fixed monthly installments
- Based on credit history and score, it may be hard to qualify for the loan you want
- Debt financing can leave the business when there is a dip in sales
- Increases business vulnerability
Collateral. If you can’t pay your debt, The lending institution might hold the company’s assets as collateral.
Equity financing involves enticing angel investors or venture capitalists to fund your business in return for their capital. These investors usually reaps a huge sizeable chunk of profit.
The benefit of equity financing
- Increased cash flow: There may be more available cash capital since you don’t have any loan to pay back.
- Long-term view: Investors may usually take a long-term view and know that return on their investments will take time.
Flexibility: Equity payments are usually more flexible compared to debt loans.
Disadvantages of the Equity Financing
Control issues: Since you will share ownership of the company, your investors may seek ownership and part of the profit
Takes a longer time: When compared to the quick debt financing options available, equity financing typically involves a longer time
Total cost: The total cost in the equity financing is generally higher than paying a loan
Choosing between debt and equity financing
The first thing to focus on is your exact capital requirements. Knowing this will make selecting the right financing much easier. If you only need a little for a short while, then debt financing is the better choice.
Equity financing usually don’t come in small amounts, but it’s possible to get as little as $10,000. Investors will often look to spend $300,000 or more for as much as 50 percent business equity. This is a worthwhile option if you could use sizeable cash.
If you need financing urgently, debt financing is the best option, but if you have some time then, you can wait and go for either of the options.
Is there another option?
Indeed, there is. You can also leverage a lender’s participation in a government grant for SMEs. The grants range from COVID-19 relief loans, and SME fixed assets financing to venture debt loans and project loans.