How to Finance Your Business: Equity or Debt?
Do you need to raise capital to grow your business? Your biggest choice is whether to use debt or equity financing. Here’s the difference between the two so you can make an informed decision.
Equity is another name for stock in your business. Equity financing is just another term for selling shares.
Advantages of Equity Financing
Here are the advantages to equity financing.
- No fixed cash payments. Investors have the right to future profits, but you don’t need to pay them on a set schedule.
- You don’t need to pay back investors if your business fails. Equity owners share in both the good and the bad.
- You get the ability to bring in strategic partners. Sometimes, you need advice and expertise in addition to cash. Selling equity to the right people can get you both and accelerate your growth.
Disadvantages to Equity Financing
Equity financing also comes with some big catches.
- You give up control of your business. Shareholders get a vote, so the more shares you sell, the less say you have in how things are run — especially if you give up majority ownership.
- It’s tough to value a new business. Because it’s hard to put the right price on shares of a new business, you may struggle to raise enough money and/or give up control faster than you intended.
- Equity sales are highly regulated. You may need to register with the SEC unless you meet very technical exceptions. This costs you both time and money.
Debt financing means borrowing. It includes everything from credit cards to mortgages.
Advantages of Debt Financing
Here’s why debt can be more advantageous than equity.
- You don’t give up control. The bank gets no share in your business as long as you pay the loan on time.
- Interest expense is tax deductible.
- You only pay a fixed amount. If your profits skyrocket, you still pay only the original loan amount not a percent of your profits.
- You don’t need to register with the SEC if you’re borrowing from banks or other established lenders.
Disadvantages of Debt Financing
Here’s why some businesses still choose to avoid borrowing.
- You have to make your monthly payments even if your business is struggling and your cash flows are low.
- Interest costs, especially for a new company without established business credit, can match personal credit card rates and eat into your profits.
- You may have to personally guarantee any loan to get approved.
So what’s right for you? Ask Merchant Capital Source about your borrowing options so you can make an informed decision.