What’s the Difference Between Debt and Equity Financing ?

It takes money to make money, however this saying doesn’t take into account the fact that not everyone has money when they start a business. Small business startup small-business-loans-finger-lakesloans in Upstate New York can be difficult to obtain, which leaves alternative financing methods. Equity financing is one alternative method to obtain funds for a new business.

Debt Financing and Equity Financing

The term debt financing is just another way of saying a company borrows money to finance their business. Equity financing is where an individual or company offers capital in exchange for part ownership of the business.

Equity Financing

There are benefits to using equity financing to obtain capital. Investors offer financing on the basis of the merits of the business plan. This is beneficial for startups, because they don’t have the three years of business financial history banks require. It is also okay if an individual’s credit is slightly bruised or that the business doesn’t have assets to use as collateral.

Repayment with equity financing is less rigid as well. There are no set monthly payments and the company doesn’t pay the investor back if the business doesn’t show a profit.

The disadvantage of equity financing is that the entrepreneur is no longer the sole owner of the business. The investors have a say in the day to day operations of the business and receive a share of the profits as a means of repayment. Not all business owners like the idea of someone else having a say in their company.

Debt Financing

Obtaining a small business startup loan in the Finger Lakes region allows business owners the ability to maintain full ownership of their company. If an individual has put up collateral, they may lose assets if they don’t pay the loan back but they maintain ownership. A small business loan also helps build business credit, which make obtaining future loans with better interest rates easier to achieve. Interest rates are also tax deductible, which is always a plus.

Small business loans are also more difficult to obtain. An individual needs to have good credit and outstanding financials. Business owners may also need collateral if they are looking to obtain a large loan. This isn’t always easy, especially in after the recent financial tumult.

There are advantages and disadvantages to equity financing. Business owners need to look at their financial situation, what they are using the capital to accomplish, and how they feel about giving up a share of their business before determining if equity financing is right for them.

Published February 22, 2017 by Carol Chernikoff in Finance


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