Business Financing: What You Need to Know

Let’s talk about business funding.

Except you are looking out for a grant, there are two major ways you can get funding for your business and that is: debt and equity financing.

Let’s start from the basic definition of both.

Equity financing involves selling off a portion of your company’s equity in return for capital. Simply put, you valuate and sell a percentage of ownership rights to your business to another person, in exchange for capital to run the business.

For debt financing, you basically borrow money to run your business and you repay with interest at the appointed time.

Now, let’s go over to the pros and cons of each financing style.

For equity, there is obviously no obligation to pay back the money you borrowed and it takes away that pressure from the business owner whereas in debt financing, you have a deadline to repay the loan.

In debt financing, the lender has no control over your business, unlike in equity financing when you have to give up a certain amount of control over your business.

Debt financing can come in the form of term loans, invoice factoring, business credit cards, personal loans, etc, equity financing on the other hand can come in the form of angel investors, crowdfunding, venture capital, corporate investors or an IPO.

To be able to acquire debt financing, you need to have a good line of credit and your financial statement. For equity financing, it’s usually based on the future value of your company and the prospects available.

What is the best source of funding from the two?

There is no one size fits all when it comes to business financing.

If you need cash really fast, and you have good financials and creditworthiness, debt financing can be the best choice for your business as it is much faster to acquire than equity financing.

Also, if you want to maintain complete control of your business, you should go for debt financing, especially if you are sure of your payback plan.

In conclusion, debt and equity financing are both important for funding your business. You can do either or both of them, by simply assessing which one fits your business goals, risk tolerance, current needs and status as a business.

Find what works best for your business and go for it.