There are investors and lenders in the world of small business financing. The 2 sources of funding can offer you with cash that you may require for growing your business. But the million-dollar question lies in which is the better option for a business. Your small business will always be in need of extra capital and when you need this, would you like to watch out for an investor or take out a business loan? You need to figure out whether or not equity financing or debt is a feasible option for your business. Read on the concerns of this article to know more on your choice.
Debt Financing – What is it?
Debt financing is the situation when you borrow money from a lending institution and which you pay back along with the interest rate. You must have taken out a loan at some point of your life, that is financing something with debt.
Advantages of debt financing
- When you take out a commercial loan, you are in full control of how the additional capital is being spent. There are few lenders who impose certain restrictions on how you can utilise the proceeds but for majority of them, financing is up to the borrower.
- A commercial loan doesn’t leave a lasting impact on the way your business is being run apart from the loan installments that you owe.
- Debt financing is a versatile category as there are different sorts of business loans with different choices of the loan amount you can get and the time you will take to repay the loan amount.
Equity financing – What is it?
Equity financing is when you trade with the ownership of your company to venture capitalists and angel investors in lieu of their capital. Equity is necessary for few industries, especially for the tech startups and other companies with global aspirations. In fact in 2015, almost $60 billion in the form of venture capital was invested in the US.
Advantages of equity financing
- You don’t require paying interest on the fund that you raise and hence you won’t require investing the profits of your business into repaying the debt amount. This clearly means you’ll have more cash available for your business’ growth.
- If you choose the right investors, you can achieve some great experience and you will also be able to create some good industry connections which prove to be valuable with time.
- In case your business fails for some odd reason, you won’t need to pay back the investments to the company.
Now that you know the benefits of both, you just have to ask yourself few questions to decide which a better option for your business is. How soon do you need money for your business and how much capital does your business need? Are you looking for more than few dollars? Do you have any problem in sharing your business? How much big do you wish to get? Depending on the answers of these aforementioned questions, you can make the decision.