16
Apr
2020

What is Equity Financing vs Debt Financing?

If you are starting a business and are looking at your financing options, there are two types of financing available: equity financing and debt financing.

equity debt financing

Debt Financing

Debt financing means taking out a loan (money that is to be paid back over a certain period of time, usually with interest). Debt financing is either short term (the loan is to be repaid in less than a year) or long term (the loan is to be repaid in more than a year). Lending parties will also look closely at the business’s debt-to-equity-ratio.

When taking out a business loan, the only obligation of the business is to repay the loan according to the terms that were agreed upon. The lending party does not gain ownership in the business.

Many lending institutions require the owner(s) of smaller businesses to personally guarantee the loan. In such a case, the commercial loan becomes the same as a personal loan.

If you are starting a home based business and are looking to take out a commercial loan, then you will be definitely be asked to personally guarantee the loan.

Advantages of Debt Financing

The biggest advantage of debt financing is that the lending party does not gain any part of ownership of your business and your only obligation to lending party is to repay the debt. Also, repayment of the loan is typically a fixed expense, according the terms of the loan.

Disadvantages of Debt Financing

The biggest dis-advantage is that the business will not have all of its cash flow available to do business. Also, the interest that is owed can be high.

Equity Financing

Equity financing is when you (the business owner) sell an ownership interest in your business in exchange for money. The business owner and the investor(s) shares the business and the risks that come with it.

Equity financing is a form of financing your business without incurring debt. With equity financing you don’t have to take out a loan since the funding is already coming from an investor in exchange for a piece of ownership in the business.

Many small and growth-stage businesses use equity financing as a source of funding. There are many sources of equity financing including non-professional investors such as family and friends, employees, etc. The most common source, however, are professional investors known as venture capitalists.

Venture capitalists are looking for businesses with the potential to grow, thereby increasing the value of their investment. They do not expect to see an immediate return on their investment.

Most venture capitalists focus on certain types of businesses such as, start-ups, specific industries (health, technology, service) or technologies.

Advantages of Equity Financing

The major advantage of equity financing is that the cash flow that would have been used to repay the loan, can be used to grow the business.

Disadvantages of Equity Financing

The major dis-advantage of equity financing is the loss of interest of ownership of your business and also the possible loss of complete control that can accompany a sharing of business ownership with investors.

If You Have Questions About Starting a Business visit www.AGuideToStartingABusiness.com

Article Source: Jose Valdez http://www.articlealley.com/article_2693_19.html

About the Author: Jose Valdez is the owner/operator of www.AGuideToStartingABusiness.com and www.AllHomeBasedBusinessIdeas.com

http://www.aguidetostartingabusiness.com

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6 Responses

  1. lily daniels says:

    hinahanap ninyo sa isang negosyo pautang, pautang personal, bahay pautang, pautang sa kotse, mag-aaral loan, pagpapatatag utang mga pautang, hindi secure na mga pautang, venture capital, atbp .. O kaya ay sa iyo tumanggi ng pautang sa pamamagitan ng isang bangko o isang institusyon sa pananalapi para sa isa o higit pa reasons.You sa tamang lugar para sa iyong mga solusyon sa utang! Ako ay isang pribadong tagapagpahiram, bigyan ako ang mga pautang sa mga kompanya at indibidwal sa isang mababang at abot-kayang interes rate ng 2%. Interes. Mangyaring makipag-ugnay sa amin sa pamamagitan ng email liardonloancompany@gmail.com

    Salamat,
    mrs liryo Daniels

  2. Mr Jackson Pauson says:

    Kumusta, ako Mr. Jackson Pauson, Ang CEO Pauson Pautang At Tax Kumpanya at pribadong pautang tagapagpahiram na nagbibigay sa mga pautang, komersyal at personal na may minimum na taunang rate ng bilang mababang bilang 2% sa loob ng 1 taon sa 20 taon na panahon ng tagal ng pagbabayad sa anumang kung saan interes sa mundo. Ang aming maayos na nakaseguro at maximum na seguridad ay ang aming priority. Gamit namin ang medium na ito upang ipaalam sa iyo na nagbibigay kami maaasahan ng tulong at handa na upang mag-alok ng pautang. Kaya makipag-ugnay sa amin sa araw na ito sa pamamagitan ng email: pausonlondandtaxcompany@gmail.com

  3. john spencer says:

    Naghahanap ka ba para sa isang negosyo pautang, pautang personal, bahay pautang, kotse
    pautang, pautang mag-aaral, pagpapatatag utang pautang, hindi secure na pautang, venture
    kapital, atbp .. O kaya mo tinanggap ang isang utang sa pamamagitan ng isang bangko o pampinansyal
    institusyon para sa isa o higit pang mga reasons.You sa tamang lugar upang
    Ang iyong mga solusyon sa utang! Ako ay isang pribadong tagapagpahiram, bigyan ako pinjaaman sa
    mga kompanya at indibidwal sa isang mababang at abot-kayang interes rate ng
    2%. Mangyaring makipag-ugnay sa amin sa pamamagitan ng email providenceloan@gmail.com

    Mr john.

  4. Andrea Beth says:

    Naghahanap ka ba para sa isang negosyo pautang, pautang personal, bahay pautang, kotse
    Pautang, mag-aaral utang, pagpapatatag utang pautang, hindi secure na pautang, venture
    kapital, atbp .. O kaya gawin tanggihan mo ang isang utang sa pamamagitan ng isang bangko o pampinansyal
    institusyon para sa isa o higit pang mga reasons.You sa tamang lugar upang
    Ang iyong mga solusyon sa utang! Ako ay isang pribadong tagapagpahiram, magbigay ako mga pautang sa
    mga kompanya at indibidwal sa isang mababang at abot-kayang interes rate ng
    2%. Layunin. Mangyaring makipag-ugnay sa amin sa pamamagitan ng email
    strongfoundationloanfirm@gmail.com

    salamat sa iyo,
    Mrs Andrea Beth

  5. Mr Anderson says:

    Kailangan mo ba ng pautang @ 3% rate ng interes? kung oo makabalik sa amin ngayon sa; georgeanderson.loanfirm255@gmail.com

  6. Zoren says:

    Thanks for the info. On my opinion, if you think your business has a potential to grow exponentially, you go with either of the two. If you go with debt financing, you own the income solely and if you go with equity financing, you share your income with the investors. It’s up to you.

    Cebu Jobs

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