Many business owners who want to expand operations or launch a startup need money. Equity and debt financing are two ways to go about securing money. Businesses that opt for equity financing inject cash into the company while those who choose debt financing borrow money to invest in the business.
Equity financing makes sense if a substantial portion of the profits would be channeled into paying off the loan. Moreover, business owners may not get approved for the type of loan or amount they would like to take out. Investors and business partners may offer to finance operations in exchange for a portion of the profit. If the business makes no profit, equity contributions are not to be paid. Moreover, having no debt to repay translates into more cash on hand.
You can cover the required startup costs by using your cash and the cash of your business partners instead of paying off a business loan. If experienced investors propose to invest in your business project, they may give you valuable advice. Having experienced investors is important for startups. There are different investors to consider, however, including venture capital funding and angel investors. It is wise to research potential investors before you make a choice. There are some downsides to equity financing, and one is that if your investors believe you have failed to act in their best interest, you may face legal action. Then, your investors gain ownership of your business, and how much they own depends on what they have invested in it. Few people are willing to give up control of their businesses, so you have to be careful when you negotiate with investors. Then, while banks and other lenders expect only to have their loans paid back, investors are in to share your profits.
Debt financing is another strategy to consider, and it means giving up some of the cash profits to repay the loan. Still, it is a good option for businesses that expect enough cash flow to pay off their debts, plus interest. One of the major advantages to debt financing is that borrowers retain ownership of their business. If you make timely payments, you also build good credit.
Debt financing is relatively easy to obtain, especially if you have good credit. Your lender cannot claim future profits from your business operations and if your company turns successful, you will reap the rewards by yourself.
Unless you take out a variable rate loan, you will know how much you pay every month. You can develop a plan to repay the principal amount and interest due.
Lastly, with debt financing, you will not be held responsible by investors and do not have to send mailings to them periodically. You will not have to seek your shareholders' vote before you take certain actions and are not required to hold meetings with shareholders on a regular basis. One obvious disadvantage is that you have to pay back the money at some point.
Equity financing makes sense if a substantial portion of the profits would be channeled into paying off the loan. Moreover, business owners may not get approved for the type of loan or amount they would like to take out. Investors and business partners may offer to finance operations in exchange for a portion of the profit. If the business makes no profit, equity contributions are not to be paid. Moreover, having no debt to repay translates into more cash on hand.
You can cover the required startup costs by using your cash and the cash of your business partners instead of paying off a business loan. If experienced investors propose to invest in your business project, they may give you valuable advice. Having experienced investors is important for startups. There are different investors to consider, however, including venture capital funding and angel investors. It is wise to research potential investors before you make a choice. There are some downsides to equity financing, and one is that if your investors believe you have failed to act in their best interest, you may face legal action. Then, your investors gain ownership of your business, and how much they own depends on what they have invested in it. Few people are willing to give up control of their businesses, so you have to be careful when you negotiate with investors. Then, while banks and other lenders expect only to have their loans paid back, investors are in to share your profits.
Debt financing is another strategy to consider, and it means giving up some of the cash profits to repay the loan. Still, it is a good option for businesses that expect enough cash flow to pay off their debts, plus interest. One of the major advantages to debt financing is that borrowers retain ownership of their business. If you make timely payments, you also build good credit.
Debt financing is relatively easy to obtain, especially if you have good credit. Your lender cannot claim future profits from your business operations and if your company turns successful, you will reap the rewards by yourself.
Unless you take out a variable rate loan, you will know how much you pay every month. You can develop a plan to repay the principal amount and interest due.
Lastly, with debt financing, you will not be held responsible by investors and do not have to send mailings to them periodically. You will not have to seek your shareholders' vote before you take certain actions and are not required to hold meetings with shareholders on a regular basis. One obvious disadvantage is that you have to pay back the money at some point.
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