Raising capital from external lenders can help you to expand your business much faster than using your own funds or relying on sales revenue.
Global equity finance increased by 56% in 2020 to $1.1 trillion and debt funding exceeded $10 trillion for the first time, as companies sought to secure liquidity during the COVID-19 pandemic.
But which form of borrowing is right for your business? What do you need to know about private financing?
Here’s a look at the differences between debt and equity funding, and the advantages and drawbacks of an equity finance loan.
Debt Financing vs Equity Financing
An equity finance loan raises funds from selling shares in the company to investors. The shareholders own a stake in the business, with the aim of making a profit from dividends or an increase in the value of the shares.
Debt equity financing, and the other hand, raises money in the form of a loan from a bank or other lender that the borrower repays with interest. The company makes repayments in regular installments over a fixed term.
Some companies use a combination of the two to raise the money they need and balance the pros and cons of each.
What Are the Pros of Private Equity Financing?
Equity financing has several advantages over debt financing, especially for small businesses:
- The company avoids having to go into debt to raise funds, and there is no defined repayment
- If the company opts to pay dividends, it can choose when and how much to pay, depending on its financial performance
- Newer companies can find it harder to secure debt financing from banks, so selling equity provides a way to raise funds
- Equity investors can bring skills and experience that help the company grow
- Some investors will buy more equity as the company expands, making it easier to secure further funding
Who uses equity loans? Equity financing is a preferred option for startups that may not have the credit history or collateral to secure debt financing. It is also attractive for more established companies looking to raise a large sum of money, as taking out a loan would mean making large repayments.
What Are the Cons of Private Equity Financing?
It is important to keep in mind that there are downsides to equity financing:
- By selling shares in the company to raise the loan, you are giving up some of the control in the running of the business. You need to consult the shareholders on every decision
- Some investors may not share your vision for the company, leading to disputes
- You need to promote the company to investors and keep them updated on operations, which can take time away from working on the business
- Finalizing the agreements with investors legally can be a long process
Setting out a strong business plan and finding the right investors are key to securing an investment without obstacles.
Seek Advice on Your Equity Finance Loan
Private equity financing can be an ideal way to raise money without going into debt. It can give your business flexibility and bring in new investors that can help take it to the next level.
Schedule a consultation with Solomon RC Ali Corporation to arrange the equity finance loan your business needs to thrive and scale.