Regardless of the type of business you are running, you will frequently need money. Most of the time, you will need cash urgently when experiencing growing pains. The reality on the ground is that getting money for small businesses is difficult. Tighter lending rules from banks and traditional lenders and a scaling back from investment by angel investors has left small businesses nearly unable to secure financing.
Small businesses can choose various types of funding. Two of the most common funding options are equity and debt financing. To know which financing option would be suitable for you, it’s important to know their difference.
Overview of Debt Financing
When you select debt financing, you are simply getting a loan that will have to be paid back with interest. Some common examples of debt financing include using a credit card, buying a car or buying a home. You can take a loan from a bank, family members or friends and pay it back with interest.
There are many reasons why you may want to choose debt financing for your business. First off, you will retain full control of the business. Your obligations with the lender will end as soon as you pay back the loan with interest. The interest charged on the loan is also tax deductible, which is an advantage for you. Finally, you will have to pay back the loan in regular installments. This makes it easy for you to plan your expenses over time.
Overview of Equity Finaning
Most people in business do not understand equity financing well. Most small business owners do not understand equity financing because it usually involves investors. Venture capitalists and angel investors will require part of your company to give you the funds you need.
With equity financing, the investor takes all the risk of the business. In case your business does not end up breaking even, you will not have any money to pay back. Moreover, through the financing, you will have more cash at your disposal since there are no loan payments to be made. Finally, working with investors can give you the boost you need to make your business profitable in the long term.
Which Funding Method Should You Choose?
When it comes to small business funding, you will not have a choice in most cases. Getting formal financing can be quite difficult if you are running a small business. On the same note, unless your business has a potential to go global, you will struggle to find angel investors interested in funding you. To get funds from angel investors, you will have to give part of the ownership of your business.
The above are the two main financing options that small businesses have.