Which is Better Equity Financing or Debt Financing
The answer to whether or not debt financing or equity financing is better for your business is that it depends on different criteria at the same time. However, if you go for equity financing, you may be able to avoid incurring debt.
Thus, you may not even be required to try out the different debt reduction options. However, in order to decide as to which will be the best option for you, it is important for you to first know in detail about both the options.
Equity financing and debt financing
As you plan on starting a small business, the first thing that will come to your mind is where you will be able to get the money to start the business. There are ways in which you can finance your business. You can take out personal loans or home equity loans in order to finance the startup costs of your business. You can also use credit cards or get loans from family or friends. This is known as debt financing. You are actually taking on debt in order to finance your business.
Equity financing, on the other hand, is taking on the investors and partners (if any). That is, the investors can invest money into your business and are supposed to get back the money in the form of profits as your business starts earning good revenue out of the business transactions. The best part about equity financing is that you are not obligated to pay back parts of equity finance.
Thus, if you try to get equity financing you may be able to stay out of debt and you won’t require any debt reduction help or strategies to get out of the stress of debt. However, you need to understand that equity financing is basically that you are exchanging money for a piece of your company or rather your business. It is like taking on a partner.
Advantages and disadvantages of both
In the case of equity financing, even if you don’t have good credit and if you are just starting a new business, you may be able to get financing for your business. Rather than taking on debt, you can use cash from your accounts and cash from the investors to finance your business.
Thus, you aren’t incurring debt and so there isn’t the pressure at the back of your mind that you will have to pay back money to the creditors. This can help you to perform well and you may be able to make huge profits out of your business. You can even choose investors who can offer you some valuable help and strategies in regard to your business.
But there are some disadvantages too and the greatest disadvantage is that you are actually required to give away part of your business to the investors. Since the investor owns a piece of your business you are required to act in their best interest.
Whenever you are faced with any serious decision to make any changes in the business or extend your business, you will have to see that the investors and partners are agreeing to the ideas.
On the other hand, with debt financing, the greatest disadvantage is that you are incurring debts and if your business fails, you may have to file bankruptcy. You will have to make payments to creditors and lenders and this creates stress.
Moreover, lenders generally do not agree to lend you the money if you are a newbie that is just going to start a business. However, the advantage is that you are the sole decision-maker and can take decisions as per your likings and disliking. You are not required to share the profits of the business with others.
So, if you have enough money and if you have the resilience capacity to deal with others, you can go for equity financing. On the other hand, if you don’t have much money and you don’t want to share part of your business with others and if you have the confidence that you will be able to make a good profit, you can opt for debt financing.