Financing your small business with debt or equity financing
Money is the most important resource that your business needs whether it’s a business or you want to launch a ne product. Two of the best strategies for financing a business are Debt and equity financing. Whereas debt involves getting the money on loan, equity will entail getting the money from the business’ shareholders.
About debt Financing
When a business borrows from a financial institution, what they are doing is to minimize their share of profits by using it to repay the loans. Either way, a business with a good cash flow should consider the loans since they are able to repay the loan amount and the interest too without loosing a share of the business to the financier unlike equity financing. Since the interest expense on the business loans is tax-deductible, you will save on taxes while at the same time building your credit.
A business with a good credit score and enough equity will very easily get financing. This is more so if the business is not already burdened with other loans.
Some business owners will raise amounts smaller than $100,000 off their personal credit in the form of unsecured loans. Since larger amounts will need to be secured, one will have to put forth their properties, personal investments and tangible assets that the bank could bank could get hold of if the loan remains unpaid.
Equity Financing
For the small start-up businesses with concern that they are qualified for loans or the fact that idf they take one they will end up paying too much of their profits to the lender, equity financing is the next best option. The financing is sourced from investors and other business partners. The good thing with equity financing is that you pay the investors only when you make enough profits to do so.
This financing option will however take from you a certain percentage control of your business. This mean that even the decisions that you used to make with little thought will now be vetted by the investor s to ensure that the are in their own best interest.
Angel investors
This is a group of wealthy individuals and networks who look for creative ideas and fund them. The Center for Venture Research (University of New Hampshire) estimated that Angels invested a staggering $25.6 billion in start-up businesses in 2006 alone. They form a big pool of long term financing option and the usually ask for lower returns than do venture capital firms.
Venture capital firms
If you want financing that will spun three to five years, you will find it in venture capital firms. Your company however has to show that it’s a high growth one as did Microsoft and Google both which attracted V.C funding. The returns that they ask are higher than those asked by angels.
The best thing however is to have a mix of debt and equity financing so that your keep as much profits and at the same time build credit to enable you get financing in the future.
About debt Financing
When a business borrows from a financial institution, what they are doing is to minimize their share of profits by using it to repay the loans. Either way, a business with a good cash flow should consider the loans since they are able to repay the loan amount and the interest too without loosing a share of the business to the financier unlike equity financing. Since the interest expense on the business loans is tax-deductible, you will save on taxes while at the same time building your credit.
A business with a good credit score and enough equity will very easily get financing. This is more so if the business is not already burdened with other loans.
Some business owners will raise amounts smaller than $100,000 off their personal credit in the form of unsecured loans. Since larger amounts will need to be secured, one will have to put forth their properties, personal investments and tangible assets that the bank could bank could get hold of if the loan remains unpaid.
Equity Financing
For the small start-up businesses with concern that they are qualified for loans or the fact that idf they take one they will end up paying too much of their profits to the lender, equity financing is the next best option. The financing is sourced from investors and other business partners. The good thing with equity financing is that you pay the investors only when you make enough profits to do so.
This financing option will however take from you a certain percentage control of your business. This mean that even the decisions that you used to make with little thought will now be vetted by the investor s to ensure that the are in their own best interest.
Angel investors
This is a group of wealthy individuals and networks who look for creative ideas and fund them. The Center for Venture Research (University of New Hampshire) estimated that Angels invested a staggering $25.6 billion in start-up businesses in 2006 alone. They form a big pool of long term financing option and the usually ask for lower returns than do venture capital firms.
Venture capital firms
If you want financing that will spun three to five years, you will find it in venture capital firms. Your company however has to show that it’s a high growth one as did Microsoft and Google both which attracted V.C funding. The returns that they ask are higher than those asked by angels.
The best thing however is to have a mix of debt and equity financing so that your keep as much profits and at the same time build credit to enable you get financing in the future.
[posted by : OFP on Mar. 04, 2011]
TAGS: debt, business, equity