Many small businesses encounter situations where they need money and have to find a way to get it. Lending standards can be somewhat tight in many places and this makes it difficult for some business owners to secure financing. There are going to be two basic avenues for business owners to travel when looking for financing. Equity financing and debt financing are the most common options, but which is better for your business?
Understanding Debt Financing
Debt financing is a term that refers to taking on debt to finance some type of purchase. Using a credit card to pay for an item or taking out a mortgage to buy real estate are both considered to be debt financing. This is going to be one of the most typical ways that a business will try to finance a purchase. A business owner might try to go to a bank to get a business loan that will make it possible to purchase something important for the company.
For most business owners, debt financing is going to be very advantageous. Your lender won’t gain any control of your business or assets and you can pay them off over time. The only danger with this method is that there is the possibility that your ability to pay back the debt could be diminished due to financial hardships. You’re betting on your ability to pay your business loan or credit card balance off over time when you make this financing choice.
Understanding Equity Financing
Equity financing is different because it involves investors pouring money into your business. You can offer shares of your business to investors so that you can get the money that you need. The one big advantage to this type of financing is that the investor is taking on all of the risks. Of course, the downside is that you will be losing a certain amount of control over your company due to giving away shares to these investors.
Which Option Is Best?
Most small businesses will choose debt financing instead of going for equity financing. Equity financing is useful if you are worried about taking on debt or if you’re having trouble securing necessary business loans. Both of these financing options have a place in the business world and they can both work out very nicely. It’s just important to weigh your options and consider whether you want to give away shares of your business or if you’re better off dealing with a bit of debt.