Many small-business owners know that their business needs extra capital. They wonder if they should take out a business loan or if they should get an investor to provide them with those funds.
When it comes to determining which option is the best for your business, you should consider the following information about each option:
What is Debt Financing?
Debt Financing is where you borrow money from a lender that you’ll eventually payback. You will also have to pay interest on the monies borrowed.
Pros of Debt Financing:
The following are some pros of debt financing:
- You are in control of how the capital that your business has spent.
- Using a business loan won’t have a lasting impact on how your business is run.
- This is a flexible category where there are a wide variety of loans and options to fit your needs.
Cons of Debt Financing Include:
- You end up paying interest on the cash that you borrow.
- It can be hard to qualify for a loan if your credit score isn’t strong.
- Assets can be taken by the lender if you don’t pay.
Considering these pros and cons, these are essentially traditional business loans. These are workable for some businesses, but not for others. Keep other options in mind when you need financing for your business.
What is Equity Financing?
Equity Financing is trading partial ownership of your business in return for people who attempt to be angel investors. You give up part of your business in return for their capital.
Pros of Equity Financing:
The pros of equity financing include:
- You don’t have to pay interest on the capital that you raise, so you won’t have to put your business’s profits at risk.
- If you find the right investors then you can get a great experience along with wisdom, connections, and inside knowledge on the business.
- If you have a failed business then you are not liable for the lost funds.
These are some of the pros of equity financing.
Cons of Equity Financing:
The cons of equity financing include:
- It can take quite a long time to have your financing approved compared to the other financing options out there.
- You give away ownership of part of your business.
These are some of the cons or downsides of equity financing.
No matter which option you choose to finance your business, there are pros and cons to both debt and equity financing. For more information on how to make the right choice for the type of funding you want to receive for your business, please feel free to contact us. We are always here and happy to help!