Equity Or Debt: Which Finance Works The Best For You?

Do you want to start a new business or are you looking to expand the one you have already established? You need finance to do either.

Coming up with options for funding your business can take up a significant chunk of your time. To kick start a new business or to light a fire under your existing one, your first option is equity or debt finance.

Zeroing down on finance option that works the best for you is a tough task and you must ensure that you have dug up the last available details about these options.

Here’s a low down of things you must consider while weighing your options of finance:

How much cash do you need?

A great starting point is to know, loud and clear, how much capital it is that you need. Start by adding up the following costs:

-Inventory
-Equipment and installation
-Lease
-Employee wages (including benefits like superannuation)
-Legal and administrative costs.

Now take this number and compare it to the amount of cash your company has on hand, to arrive at the exact amount you will need to borrow. Remember that the more the higher your debt, the lower will be your control on your own business. To ease some financial pressure, you may consider pumping up your savings, or even continuing with your day job to ensure that income keeps coming in.

Don’t forget to look at grants from the government. Federal, state, and even local governments sometimes offer funding for new businesses.

Finance
To ease some financial pressure, you may consider pumping up your savings.

Debt Finance

The most mainstream type of finance, you borrow money, and agree to pay it back within a time frame with the accrued interest. Examples of debt finance include

-Loans from banks
-Credit cards
-Mortgages
-Overdrafts
-Leasing, hiring, or purchasing equipment

Why debt finance may be good

One, you are not answerable to any investors so you retain control over your assets and your business. Two, your business’s profit is yours to use as you like. Three, interest accrued on business loans may sometimes be tax deductible- ask your accountant about this.

Challenges with debt finance

– Banks ask for financial records, projections, and business plans before approving debt finance. This may be hard for new businesses to put together.
– Interest payments and fees need to be repaid. So, your business must be able to generate cash with the invested capital.
– Interest repayments may eat into your cash-flow.
– Any assets signed on as collateral or security for the loan may be repossessed by the bank if you fail to make repayments.

Equity Finance

This means investing your own or other people’s money into your business. The investors become part owners of your business and need to be paid profit.

Sources of equity capital:

-Friends and family
– Angel investors: individuals investing private funds (usually less than $2 million) into startups.
– Crowdfunding: several people come together to donate to a business.
– Public float: issuing securities like shares to people.
– Venture capitalists: pro investors who put money (usually between $2 million and $10 million) into companies.

Why equity finance is good?

You don’t have to make periodic repayments on interest.

Things to consider about equity finance:

– If your investors are family and friends, your personal relationships with them may be affected.
– You may face competition from similar businesses in attracting an investor.
– You share profits with your investors and they may want to have a say in business matters.