According to a 2017 study, 68% of businesses have outstanding debt. Many companies run short on money and look for ways to continue their business journey. However, if you don’t want debt, there are other ways you can get money when you need it.
Read on to learn the differences between debt vs equity financing and find out which one is right for you.
So, what is debt financing? Debt financing is the act of borrowing money with interest and paying it back. A business loan is a form of debt financing.
Sometimes, this type of outside financing comes with restrictions. Companies may be prevented from taking advantage of opportunities outside of their basic business realm. If you need to access more debt financing, later on, you need to have a low debt-to-equity ratio.
With debt financing, the lender does not control your business. After you have repaid the loan, you no longer need to keep a relationship with the lender.
The interest you pay with this form of financing is tax-deductible. A major benefit of debt financing is that loan payments don’t fluctuate, so you have an idea of your future expenses.
There are a lot of things to consider before taking out a loan. For instance, you need to be able to pay these expenses on a regular schedule regardless of the circumstances going on. This could be the economy going under or your business not growing as quickly as you thought.
You probably knew more about debt financing than you thought, but what is equity financing? This type of business financing involves selling part of the company’s equity to receive capital.
If you are raising capital, you may be aiming to fund business expansion. If you sell equity to an investor for capital return, they own part of the company and can make business decisions moving forward.
Is debt financing or equity financing better? When it comes to repayment, you may opt for equity financing. You have no obligation to pay the money back that you acquired. There are no monthly payments, which means you have more capital available to invest in growing the business.
The downside is that the investor you give part of your company to now gets part of the profits as well. To part with an investor, you will have to buy them out.
Debt Financing vs Equity Financing
The differences between debt vs equity financing are not subliminal. With debt financing, you are required to pay the money back but have full control over your company.
Equity financing is the opposite. You don’t have monthly payments, but because you are selling part of your company, but part of the profits and decisions are no longer just yours.
Debt vs Equity Financing: Which Is Better for You?
Becoming an industry leader is impossible without time, effort, and money. Without the proper finances in place, you are forced to make decisions.
Now that you know the differences between debt vs equity financing, you can ask the real question at hand. Is taking out a loan or selling part of your company the better option for your business?
Solomon RC Ali Corporation is here to help your business succeed. Get in touch with us now for your financial consulting needs.