A good idea and a wild guess will not do. As they say: The good news is that you will have a partner. Similar to debt financing, equity financing has benefits and drawbacks to consider. If you have ever seen the television show Shark Tank, that is equity financing; you sell a percentage of your business for the money.
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. You might be burning cash for the first couple of years, with little in the way of net profits, yet still have to make monthly debt service payments. Share your story below. The simple answer is that it depends. Most of the time, you just want to find content that has a particular phrase. Equity Financing Pros & Cons. Most companies use a combination of these two different types of financing in the course of their business life. © Copyright 2020 Bank of America Corporation. Equity Financing vs. Debt Financing: An Overview . Here are the pros and cons to both debt and equity financing to help you decide which is right for your business. Pros. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. You can participate in a number of ways, Pros and Cons of Debt and Equity Financing. That can be a huge burden on a startup. Pros and Cons of Equity Financing As a business grows, every business owner faces the debt vs equity financing decision for funds to support growth. The Cons of Debt Financing The most significant danger and disadvantage of using debt is that it requires repayment, no matter how well you are doing, or not. And investors and entrepreneurs don’t always see eye to eye, so there is always that too. In both cases, lenders and investors want to see that you have a good understanding of your business. Have you recently financed your business using debt or equity financing? The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. Click here to read more articles from small business expert Steve Strauss. Here are the pros and cons to both debt and equity financing to help you decide which is right for your business. Now that you’re a member of the community, spice up your profile by adding photos, a custom avatar, information about your small busines, and much more. Take part in the conversation and post your own question to the community. Debt financing is what it sounds like – you get a loan and take on debt that will need to be paid back. Equity financing is when you get an infusion of cash from an investor in exchange for a share of the business.
Other factors on the positive side of the ledger include: So, whether you decide that debt or equity is better for your business, it is good to know that you have options. Error: You don't have JavaScript enabled.
But that same fact can also be a negative. Content tagged with financing_your_business, Content tagged with small_business_owners, Content tagged with small_business_expert, Jive Software Version: 8.0.2.0 , revision: 20150911111911.7f31811.release_8.0.2.x, We would appreciate having your voice in the Small Business Community. The Cons of Debt Financing The most significant danger and disadvantage of using debt is that it requires repayment, no matter how well you are doing, or not. Bank of America is not responsible for user posts and other user content appearing on this website and does not endorse or guarantee the perspectives, the advice, the users, the businesses, or the products or services sold by any users or businesses that appear on this website. In order to get the loan, or induce that investor, you have to have a business plan that makes sense with numbers that are realistic. The question then becomes, which option is better? Debt financing refers to borrowing funds which must be repaid, plus interest, while equity financing refers to raising funds by selling shareholding interests in the company. This tool uses JavaScript and much of it will not work correctly without it enabled. Equal Housing Lender House. The simple answer is that it depends. Be prepared to spilt the pie (in many ways) if you seek equity investors. issuing bondsBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital Take a look at these pros and cons to determine if equity financing would be the smartest financial move for your business. As mentioned, equity financing can seem like the perfect solution because you get the money and don’t have to pay it back. The answer depends upon your business, situation and goals. Debt vs Equity Financing Debt vs Equity Financing Debt vs Equity Financing - which is best for your business and why? Debt means applying for a loan from a lender. Angel investors therefore often help the entrepreneur in many other ways – with introductions, advice, feedback and so on. Join our small community for expert insights, insider tips, and the industry knowledge you need to see your small business grow.
Aside from the cash infusion, another big benefit to getting an equity partner is that this will in fact be a partner – someone with a vested, financial interest in seeing you succeed. ©Steven D. Strauss, http://www.smallbusinessonlinecommunity.bankofamerica.com/people/Steve%20Strauss/content, You can read more articles from Steve Strauss by clicking here. But of course, the analysis has to be deeper and more nuanced than that. There are traditionally two ways to finance a business: Debt financing and equity financing (these days, there is also a third option, crowdfunding, but that is an article for a different day.). He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. Please turn JavaScript back on and reload this page. The equity versus debt decision relies on a large number of factors such as the current economic climate, the business' existing capital structure, and the business' life cycle stage, to name a few. One thing that both debt and equity financing have in common is that they make you a better businessperson. Investors Take On Risk: With equity financing, the risk falls primarily on the investor. Where do you get the capital need to start it?
Debt Financing: Some benefits of debt financing include: No partners: While a bank or other lender will have a vested interest in your success, they do not become partners per se. The bad news is that you will have a partner. So let’s say you started or even want to start a business and need financing. Bank of America, N.A. Investors only see their returns if your business is a success. Here are the easiest ways to find the content you want. For most entrepreneurs, the benefits of getting a loan usually far outweigh any negatives. All rights reserved.
Member FDIC. An owner has two choices: take on debt or raise more equity. To raise capital for business needs, companies primarily have two types of financing as an option: equity financing and debt financing.