Whether you want to start a new business or grow the one you already have, you will need money. Debt financing and equity financing are two different ways to get money. To get debt, you have to borrow money for your business. To get equity, you have to put your own money or the money of other stakeholders into your business.
Debt Financing
Many business owners don't want to borrow money from a bank because it will cut into their cash profits. But it could be a good choice if you have enough money to pay back the loans and the interest.
Equity financing:
Small business owners often choose equity financing because they don't know if they'll be able to get a loan or don't want to use their cash profits to pay back the loan. Equity financing can come from investors and partners.
The pros of borrowing money are:
- You don't have to give up any of your business's ownership or future profits. Your lender doesn't have any say over how you run your business.
You can keep your business's profits in the business and increase its long-term value, or you can pay a return to the business's owners.
- You can avail tax deduction on interest paid.
The bad things about debt financing are:
- You have to keep making enough money to pay back the loans.
You will pay back the loans with the money you make. You might make money, but you won't have any money to show for it.
The interest rate will go up the more risky the loan is.
As the owner of the business, you might have to give some kind of guarantee.
- If you don't pay back the loan, the lender has the right to take your collateral.
Too much debt could hurt your credit score and make it harder for you to get money in the future.
Equity financing has the following pros:
Even if your company goes bankrupt, you don't have to pay back the money you put into the company.
- You do not have to put up the assets of your business as collateral to get equity investments.
- Lenders, investors, and the IRS will like a business more if it has enough equity.
If your business doesn't have to make debt payments, it will have more cash on hand.
Equity financing has some drawbacks, such as:
You will have to give up some of your ownership stake, and other equity investors will share in your business's profits.
You might have to deal with people who have different ideas about how the business should be run.
- There is no tax break for dividend payments.
Most businesses get their money from a mix of debt and equity. If you don't have enough equity, you might not be able to get loans or pay them back. On the other hand, if you don't have much or any debt, it could mean that you're not willing to take risks, which could mean that your business won't grow.
A good alternative to this is a business cash advance.
But are there any other ways for small businesses to get money besides loans? Yes, there are a lot of other places where small business owners can get a business cash advance.
Business cash advance is not a loan, and the company that gives it gets its money from the business's credit card sales during a certain time period. This makes it easier for the business to pay back the loan, and the terms and conditions to get such a cash advance are also easy to meet.
There are a lot of places that offer these kinds of cash advances. Usually, organisations like [[MerchantCashDirect]] give cash advances to help with working capital needs. Most of the time, they go after certain industries. To add to the example of the organisation above: They want to give money to people in the restaurant, retail, or service industries who take in at least $4,000 per month in credit card sales.
I hope that my articles have helped clear up some questions and given some useful information. If knowledge is power, then you now have the knowledge you need to get a loan and realise your dreams.
