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Debt or Equity?

When it comes to choosing the right type of financing you will have to consider multiple factors on both sides, type of financing and your business needs. As we mentioned in previous articles all financing boils down to two types: debt financing and equity financing.

If you are new in business you will need money to invest in expansion and growth. Chances are that you don't have long history of profitability and that you didn't have time to build good credit score which means that banks and some lenders will not be eager to give you a loan. Or on the other hand you are not comfortable with a fact that you can lose your assets whether business or personal. In that case equity financing will work best for you. This is an opportunity to raise cash without strict requirements that bank will demand from you and you will not have to pay monthly rates to the lender as in the case of debt financing. By avoiding monthly payments you will have more cash on your hands that you can use to develop your business even further. Besides cash your investors can often offer you helpful guidance and advises, especially if they are in a similar market sector because they want to see your business succeed and get the highest return rate possible. On the other hand if things don't go as planned you don't bear all the risk but it is dispersed among investors and you won't have to repay them their money.

There are also some drawbacks to equity financing. Investor accept the risk that comes with new ventures but they get part of your business for their investment. Amount of investment  is in proportion with percentage of ownership. To avoid future problems  you have to be careful who do you choose to invest in your business. That brings us to another challenge, it is not always easy to convince people to invest in your business and you will need time to develop good business plan and perfect your pitch. Equity financing carries fair amount of legal and regulatory compliance. 

Debt financing is widely used method in part because there are so many options in this type of financing. Debt can differ in borrowed amounts, its purpose, length of repayment, interest rates, etc. The biggest difference in comparison with equity financing is that it doesn't dilute ownership, you will not have to share your potential profit in the future. After you repay principal and interest rate your relationship with lender is over, he doesn't care how you will run your business as long as you are regular with your payments. Regularity of payments is a great way to build business credit score. Since you will have the responsibility to pay your rates every month it makes it easier when making financial plan and more predictable. Interest rate that you pay is tax deductible, lowering the actual cost of debt. Debt financing is generally quicker and less complicated way of acquiring capital. It is especially suitable if you in business for a while and need capital for short term funding.

Unlike equity, even if your business fails the loan must be repaid, you bear all the risk. Because you have obligation to make regular monthly payments it can be challenging to secure enough working capital. Not all loans are suitable for every kind of expense and in that way it can be limited. Long term business loans have cheaper interest rates but they are harder to get since they have more requirements like good credit score and collateral.

Mina Mar Group can help your business obtain the funds you need. Even if you are still not sure what is the best type of financing for your business we will also help you with determining the best option depending on you business goals and needs and reason you are seeking funding.


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Location: West Palm Beach, FL, USA

Comments

  1. Micheal AlexanderNovember 10, 2020 at 8:55 AM

    Great blog. All posts have something to learn. Your work is very good and I appreciate you and hopping for some more informative posts. Finance Deductible

    ReplyDelete

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