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 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.
- 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.
- 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 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.
- 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)
- 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?