Any business is likely to need additional capital at one point in time. Most of the time, you will need cash urgently when experiencing growing pains. The reality on the ground is that getting money for small businesses is difficult. Over the years, lending conditions have become tighter and investors are not pumping in as more money as before into small businesses.
Small businesses can take advantage of different types of financing options. Debt and equity financing are among the most common funding options. It’s important to know the difference between the two financing options to know which one will be suitable for your business.
How Debt Financing Works
With debt financing, you are simply given a loan and have to pay it back with interest. Some of the popular debt financing examples include taking a loan to buy a car or a house. No matter where you get the financing from, be it a bank or from family members, you will be charged an interest.
Choosing debt financing for your business may be a wise choice for different reasons. To begin, the lender has no control of your business. After paying back the loan, your obligations with the lender will have ended. The interest charged on the loan is also tax deductible, which is an advantage for you. Finally, you will have to pay back the loan in regular installments. When you know the installments you will have to make, planning for your expenses over time becomes easy.
What is Equity Financing?
Equity financing is not well understood as much as debt financing is. Most small business owners do not understand equity financing because it usually involves investors. With equity financing, you will have to give part of your company shares to venture capitalists or angel investors.
With equity financing, the investor takes all the risk of the business. Should the business fail, you will not be required to pay back any funds. Moreover, you will be left with more money at your disposal since there is no money to be paid back by the investor. Finally, venture capitalist can provide you with advice and a platform to launch your business globally.
Which is the Best Way of Funding Your Business?
In most cases, you will not have a choice when it comes to funding. If you are running a small, early-stage startup, getting formal equity financing can be quite difficult. On the other hand, venture capitalist prefer companies with a global reach. To get funds from angel investors, you will have to give part of the ownership of your business.
The above are the two main financing options that small businesses have.