What’s Good for Your Small Business: Debt or Equity Financing?
Every small business requires extra fund to keep working. What could be the option for such requirement? Is business loan or investor would be fine? So, deciding how to fund your venture is an important decision. So which one to opt: Debt or Equity?
Let us understand the both the options:
Essentially, when you borrow amount from the lender which will be pay back with interest is debt financing. You must have financed something with debt when you took loan.
Why to opt for this option?
- You control the expenditure with a business loan as some lenders might impose several restrictions.
- The fund is not going to leave a lasting impact on how your business is operated apart from loan payments you owe.
- Debt financing option is counted among the flexible category.
In this kind, the owner exchanges some portion of their business stake or ownership of their venture to convince investors or the business capitalists to invest capital.
- No interest payment on the raised capital so the owner doesn’t need to put their profits into repaying debts. It implies the entrepreneur got more cash for growing their venture.
- You don’t have to pay back the investments even if the venture fails.
Now which from the above two is right for you?
Below are the questions which can help you in deciding the best between the two:
1. How quickly you need loan?
If you need cash ASAP then debt financing is your answer. It is available incredible fast or say in hours if you contact the right lenders. But in the latter one, you are required to find the right investors, pitch the business and arranging legal documents.
2. How much you need?
If your venture doesn’t require lot then debt financing is better. The option of equity financing only supports big term loans.
3. Issue in sharing the core concept of venture?
Some of the owners don’t like to share their business which is okay. Equity financing is not your option if you do not wish to lose control over your venture. Either option is fine if you are concerned about loan than ownership.
4. Looking beyond than just loan?
If you are looking for than money, equity is better for you. Debt is transactional. Equity allows you to access the sponsor’s knowledge, expertise and contacts.
Finding and acquiring the right kind of fund is a big deal and leaves an impact on how business operates.