Debt or equity financing: What's the best choice for your business?
It has been observed that financing business startups is not so easy feat. If one can swing it, bootstrapping is the best option but no matter what, one will require small amount of money for turning idea into somewhat tangible. If funds are not rolling in yet, it’s hard to make a top notch product. That is the reason why many startups and small businesses provide equity to investors and employees. It might possible that even if investors from outside are not for you, but still you may be interested in providing equity to employees. But the question is, how will you do it? If you are running a smaller business and are thinking to offer equity then stick with all your financing options. Many entrepreneurs think that the best and common form of raising money for their startup is equity financing. It involves the usual pitching to venture capital firms and investors for raising money in exchange for equity in company. However, this is not the only way of raising money for company rather debt financing can help in other cases also.
As it is said that private equity financing is not for all but it provides greeting option for debt financing to several business owners. In fact, private equity financing against debt financing cannot be charged with two major gripes business owners’ level due to risk with personally guaranteeing a loan and the constraint placed by it on available cash flow. If you have a great idea for running a startup business but don’t have enough cash for funding your business then equity is the best solution for you. The main two common equity types are:
Equity Financing: In this, in order to finance your startup business, you need to sell shares to outside investors.
Equity Compensation: In this, one has to offer percentage of company profits in exchange of less salary.
Private equity eradicates the drawbacks of debt in that and for paying down debt, it does not divert capital from the business rather it shares risk in the business along with the entrepreneur. Another advantage of private equity is that you don’t need to pay right back to investors after they provide funding to your business. It means that one has more time for growing his business before he starts worrying about how he will how he will pay for it or not. And in case business fails totally, one doesn’t have to repay. It is fact that investors either swim or sink or alongside the business owners.
Debt financing is money that has to be pay back and it can take the form of a line of credit, a merchant cash advance, a loan, or a credit card. Using loan for obtaining capital or growth funds for starting a business is referred as Debt financing. Debt financing allows businesses to get the money they require for their business without giving away equity. Provided businesses can continue with the payments of interest and pay off all they owe and will get to maintain all the remaining proceeds in the coming years.
A number of sources are there for obtaining debt financing for your business. Some of the sources are outlined below:
Private Lenders: It can come from lenders such as family members, friends, colleagues, relatives, spouses, and private donors from whom you can connect with for raising funds.
Traditional Lenders: It includes banks that may do advance financing in the various business forms such as lines of credit and secured as well as unsecured loans.
Personal Financing: One can choose this from for obtaining personal loans from traditional lending sources or can use credit cards for financing business using debt.
Modern Lenders: this type includes payday loan lenders and peer-to-peer lenders.
Moreover, private equity is actually an umbrella term for huge money raised directly from recognized institutions & individuals and pooled in a fund that mostly invests in certain range of business ventures. For considerable long-term gains, attraction is the potential. Generally the fund is placed as a limited partnership, with the investors as limited partners and a private equity firm as the general partner. Typically, private equity firms charge huge amount of money fees for taking part in partnership and be inclined to focus in a particular investment type. And debt financing has its advantages as well as disadvantages; it’s up to you whether you choose this kind of financing for your business startup will work for your requirements.