Equity Vs Debt Financing

b>Equity vs Debt Financing….Raising Capital for your business

There are two major types of funding your business can seek to raise capital. There is equity financing and debt financing. However your business is not limited to just one form of financing, your business can decide to raise capital by using a combination of Equity and Debt Financing.

Advantages and Disadvantages between Equity vs Debt Financing.

equity financing
Equity Financing– Equity financing is an investment in your business in which the investor hopes to see higher returns for their investment. In this type of funding you sell a portion of your business in order to raise money. Since the investors own a percentage of the business, they get a percentage of the profits as well. An example of equity financing is turning your business into a corporation in order to sell shares of stocks and raise capital.

Advantages:

  • If your business fails you will not have to pay investors back for the money they lost.
    They accept this risk when investing in your business.
  • Investors such as venture capitalists can offer valuable tips and advice for your business.
  • You can obtain money for your business without having to repay in a certain amount of time.

Disadvantages:

  • You will share ownership of the business.
  • Investors can be really picky on what business they choose to invest in.
  • You may need to supply information to investors so they can monitor business performance.

debt financing
Debt Financing– Debt financing is the process of borrowing money that must be paid back over a certain amount of time such as a loan. In addition to repaying the amount you borrowed you will also be subject to interest rates and other fees specified in your loan contract; however interest on a loan may be tax deductible for your business (Be sure to inquire about this to your business accountant or loan officer). Money obtained through debt financing must be paid back regardless of whether your business is successful or not.
Advantages:

  • You will have complete ownership of your business.
  • After you finish paying back the loan you no longer have any financial obligations to the loan officer.
  • Can be tax deductible. (Ask your accountant about this)

Disadvantages:

  • You will have to pay back the loan even if your business fails.
  • You may have to put your house or other assets as collateral in the case you are not able to pay back your loan.
  • You may have to pay high interest rates or other fees.

Questions to ask yourself

When comparing Equity vs Debt Financing ask yourself these questions…

  • How much money money do I need?
  • Am I willing to give up a percentage of ownership in order to raise capital?
  • If necessary am I willing to put my house or other assets as collateral on a business loan?

Why Business Loans get Rejected

Why business do business loans get rejected? Is it because loan officers are just mean people? Though it may seem like it sometimes loan officers are not mean, they are just critical because they have to be. Try to see the situation through the loan officers perspective. A loan officer wants to be sure that you will be able to pay back the loan. That is why he/she will analyze several factors including marketing plan, qualifications, and experience. If you are rejected for a business loan don’t get discouraged, learn from your experiences and know better for the next time. Below are 5 major reasons why small business loans get rejected.

  1. No business plan– Not having a business plan is one way to show bank lenders that you are not prepared for starting a small business. Loan officers want to see that you spent time researching and planning your business venture.
  2. Lack of experience– You should have some experience in the field in which you wish to start a business in. For example if you want to open a restaurant, get a job as a waiter or better yet a restaurant manager. This will give you valuable experience in the field and will also be more appealing to the bank lender. Having experience starting or managing prior successful businesses can also be appealing to the bank lender. You can also hire experienced employees for your top leadership positions (such as managers).
  3. Lack of investment– If you don’t invest your own money why should the bank choose to invest in you. Banks want to see that you are confident enough in your business idea to invest your own money.
  4. Lack of confidence– Show confidence in your business idea. Demonstrate that you are prepared and experienced. Know your stuff- provide facts to support that your small business will become a success. Use statistics, market trends, ect. (Should be included in your small business plan). Do not show that you are desperate for money.
  5. Lack of financial information– Bankers like to see that you did your math. Include future projections of profits for your business and amount of time it will take you to pay back the banker. Bankers analyze this data when determining if they want to give you a loan.

Go back to Getting a Small Business Loan

Small Business Loan Terms

small business loan terms

Getting an overview of the different small business loan terms will help you better understand your loan agreement. When getting a small business loan you will find that there are different loan terms to evaluate in your loan agreement such as interest rates, late charges, ect. You want to get the best small business loan possible therefore be prepared by learning about the different small business loan terms to expect.

It is important for you to know that terms in your small business loan can be negotiated. If you are not comfortable with the loan process seek advice from professionals such as attorneys, CPA (certified public accountant) or small business consultants. They can help you analyze the terms and conditions in your small business loan.

Business Terms you should know before negotiating a business loan

Below are listed some of the major small business loan terms you will find in your loan agreement. Familiarize yourself with these terms. Decide which small business loan terms are the most important for you and which terms you can be flexible with.

Due Date– Make an educated estimation of when you will be able to pay back the loan. Make sure you give yourself a reasonable amount of time.

Late charges– In the risky and unpredictable world of Entrepreneurship, things don’t always work out the way you planned. When things aren’t going as planned for your small business, the last thing you want is to be hit with all those late fees. Just in case you are not able to pay your payments on time make sure your late fee is reasonable.

Collateral– This is a scary one. In the dreaded event that you are not able to pay back your small business loan, your bank may require you to guarantee them your personal assets such as your house or property as collateral. If you can’t pay them back they have full authority to seize your house or other personal assets. Loans that are backed by collateral are called secured loans. Unsecured loans do not require collateral however they are more difficult to obtain. They are issued to the most credit worthy candidates.

Prepayment– You know that you will be charged a late fee if you do not make your payments on time, but did you know you can also be charged a penalty for paying off your loan too early? The reason behind this is that banks don’t like you paying back your loan too soon because that means less interest money for them. Of course you would want to pay off the loan the earliest possible so find out if they offer you this flexibility without charging you a penalty.

Loan Covenant– A lender may impose certain rules and restrictions on your small business to increase the chances of you being able to pay back the loan; this is called a loan covenant. For example they may prohibit your business from loaning money or may require you to submit monthly financial statements. Violations of these covenants can lead to a default on the loan. Keep in mind that a lender can decide to wave a covenant. Make sure your covenants do not pose any serious threats to your small business growing potential.

Interest Rates– Banks normally charge an interest rate of 6% and 9%. Getting an interest rate as closest to the prime rate is ideal. A prime rate is the interest rate lenders will charge their most high qualified candidates.

Fees– Always read loan documents carefully so you are not surprised by any hidden fees. Lenders may charge a fee for discretionary actions such as getting appraisals for your assets. Lenders may also charge processing fees. Be sure to get an estimate for these fees before accepting the loan. Also examine the attorney fees. Attorney fees are used to cover the costs of collecting on a loan if you fail to make payment. Make sure that these fees are reasonable.

Go back to Getting a Small Business Loan

Getting a small business loan

Getting a Small Business Loan

If you lack the necessary funds for starting your business getting a small business loan is a common method of acquiring the money needed for business expenses. Getting a small business loan can be done by visiting one of your local banks; however not everyone gets accepted for a business loan. Lenders and Investors are aware that the startup stage of a business often poses the most risk. Existing businesses have an advantage over start-ups since lenders and investors view them as more stable. Getting a small business loan will not be easy, however it is not impossible. Being prepared and knowing what to expect will better your chances of getting a small business loan.

Tips you should know

Know how much money you will need– Sounds simple enough doesn’t it? However many entrepreneurs underestimate how much money they really need to start their business. One of the top reasons why small businesses fail is because the owner didn’t have enough funds to support or grow their business. However on the other hand borrowing too much money will take you longer to pay back and can result in higher interest rate fees. Do your research and come up with an accurate estimation of how much you will need before getting a small business loan. Be sure you are financially prepared if an unexpected event should happen. Look at not only your short term expenses but also your long term expenses. Keep in mind your business may not make any profits for the first couple of months (or even years).

Schedule a meeting-If possible call your local bank ahead of time or arrange an appointment to see the loan officer. Many bankers prefer that you call ahead to schedule a meeting prior to coming in.

Learn about the small business loan terms– Knowing about the different loan terms will help prepare you for negotiation and better your chances of achieving favorable loan terms.

Bring your business plan– A business plan is essential when acquiring a small business loan because loan officers want to see that you have planned out your business venture. Your business plan will help the loan officer determine if your likelihood of paying them back is favorable.

Provide Personal Financial Documents– Many times loan officers will want to see your personal financial history. A credit rating report or a tax return should be sufficient.

Demonstrate your expertise– Demonstrate to the loan officer that you know your stuff! Loan officers like to see financial information so have that prepared. Show future profit projections for your business and a debt repayment plan. You must be confident in your business plan and show the lender that you are capable of paying them back.

Don’t sign until you are ready – After the negotiation process is over the loan officer will prepare the documents if you are accepted. You can then take the documents to an adviser such as an attorney or business consultant before signing it.

Facing Rejection– If you are rejected for a business loan don’t let it discourage you. If you really believe in your business idea keep trying. Try getting a small business loan through the SBA. Learn from your experiences and improve. Read Reasons why business loans get rejected.

Raising Capital for Small Business

Importance of Small Business Funding

Raising capital for small business expenses is not the easiest step of starting a small business but it is necessary. One major reason why small businesses fail is because the owner lacked necessary funds. Money is needed for equipment, property and more essentials for your small business. You may wonder how you can raise the money needed to start your small business.

There are two major sources of funding you can seek for your business: Equity VS Debt Financing. Below there are listed various methods of raising capital for a small business including forms of equity and debt financing. Analyze each option below and determine which method/ methods is better suited for your particular small business.

9 Ways of Raising Capital

1.Saving up your own money– When starting a small business you may not have all the money needed for start up costs; however you should have some money saved up for the purpose of starting your business. Bank lenders in particular are more suspicious of entrepreneurs who don’t invest in their own business. As a result they can decline a loan because of your lack of investment.

2.Borrow from Friends and Family– I know raising capital for small business expenses by asking friends and family for money isn’t fun, but hopefully you can win them over with your great business idea. To avoid complications in the future make sure to have a written agreement stating terms and details of the loan. You wouldn’t want to fight with loved ones over money. Be sure to present your proposition in a professional manner. Show them your
business plan
, explain to them why they should invest in you, and answer all their questions. If someone is giving you money for your business as a gift, be sure you obtain a letter from them stating the amount of money and that it was a gift. This is precaution to avoid future complications and misunderstandings.

3.Getting a small business loan– When raising capital for small business expenses many entrepreneurs go this route. However before attaining a loan you should be aware that there are many factors associated with business loans such as interest rates, late charges and collateral. Local community banks are often a great place to obtain a business loan. If you get rejected for a bank loan you may qualify for a SBA loan.

4.Find a business partner and use their funds– Another way of raising capital for small business expences is to develop a business partnership with someone who can invest in your business. Make sure to present them with a persuasive explanation for why they should join forces with you.

5.Incorporating your small business-Many entrepreneurs decide to incorporate their businesses for the purpose of raising capital for small business expenses. When you incorporate your small business, you will be able to sell shares of stocks. However when you sell shares of stocks you will also be selling a percentage of the ownership over the business. So if you sell 50% of your corporation’s shares of stocks you are selling 50% of the business ownership.

6.Finding a venture capitalist– Venture Capitalists are professionals who invest in businesses that show a high growth potential. Not only do venture capitalists provide funding for their clients by investing in their business but they also provide valuable business advice and strategies. If a venture capitalist decides to invest in your business it demonstrates to others that they viewed your chances of success to be favorable. However once a venture capitalist decides to invest in your business they often have a say on how it should be run. Since venture capitalists invest in businesses that demonstrate very high and fast growth rates, many small businesses do not meet the criteria.

7.Small Business Investment Companies– Small Business investment companies are venture capitalists targeted for small businesses. They are partnered with the government and provide small businesses with funding in exchange for a percentage of ownership in the business.

8.Angel investors– Finding an angel investor is another way of raising capital for small business expenses. Angel investors are simply private investors who invest money in your business with the belief and hope that in a couple of years they will see a higher return on their investment. After a 5 year period an angel investor may expect a return of at least double their initial investment. Of course starting a small business is risky business so the angel investor may not see any return if your small business fails. Naturally an angel investor will want guaranteed exit provisions in the case that your small business fails.
You can find an angel investor by networking with other business owners and small business professionals. You can also subscribe to angel network firms that can match you with an angel investor.

9.Credit Cards – Many small businesses have turned to credit cards in order to pay their small business expenses. Credit Cards may seem like a quick fix but make sure the terms and interest rates are reasonable.

Wait Before you go…

Before raising capital for small business expenses it is important that you first determine how much capital you need for your small business. Create a business budget. Take in consideration that entrepreneurs often underestimate how much money is needed to run a small business and fail to expect the unexpected. For example what if your equipment gets damaged and you need replacements…do you have a back up plan? That is why it is a good idea to always have extra money put aside just in case.