When you start a new business there are a lot of expenses to consider. From property and taxes to inventory and staff, you don’t want a shortage of cash to limit your business dreams. Two main ways of injecting cash into a business are debt financing and equity financing. Read on to learn more about these two methods and how to determine which might be best for your business.
What Is Debt Financing?
Debt financing is simply a small business loan. A bank or other lender provides cash upfront in return for fixed monthly payments for a set number of months. To get the best rate you need good credit and will likely need to secure your loan with collateral. If you use the loan to buy property or equipment, the collateral can be those items, just like when you buy a car, the vehicle itself is the collateral. On the other hand, if your loan is not tied to tangible assets and your business doesn’t have tangible assets, or you need a loan larger than the value of your business in its entirety, you may have to use your personal possessions as loan collateral.
The upside of debt financing is that you maintain complete control of your company. You’ll also have fixed monthly payments which will never come as a surprise. A loan can be a great way to make the next leap in your business growth, from a new location, new equipment or new employees, but it isn’t for everyone.
What Is Equity Financing?
If a loan isn’t in the cards you can try equity financing, looking for investors who think your ideas have potential. Investors purchase a part of the business in exchange for their funding. The upside of a cash infusion from these venture capitalists is that there is no repayment down the road. A monthly loan comes due whether the business has a booming month or a slow month, while an investor only gets paid in proportion to the profits of a company.
The main drawback can be significant though. The more investors a company has, the more voices have a say in how the company is run, and if you’ve sold more than 50% of your company, you are no longer the primary business owner. For some companies, the investment of a private equity firm signs their death warrants, as the firm maximizes profits for its investors at the cost of the customer base.
No matter which option you choose for funding your business there will be advantages and drawbacks. Discovering your own priorities before you choose will make it easier to find the best fit for your small business.