Facts About Debt & Equity Financing

Posted by transworldma on November 14th, 2021

A business cannot afford to remain static. It needs to be operational 24X7 and progress steadily but surely. It isn\'t easy to find the right financing to expand one\'s reach and enter new markets aggressively. There is a way out, however. A business owner is free to consider debt & equity financing to meet the needs.

A careful study of the processes is mandatory when one is keen to utilize any one of the mentioned strategies. Sure, there are distinct advantages associated with both debts as well as equity financing. A company may decide to use a combination of the two as well. It may be best to check the salient points of each and then go on to make an informed decision. Here are the primary features of each type of financing:

Debt Financing

This is a kind of loan where the borrower has to repay the amount and the specified interest.

There my certain limitations imposed on obtaining debt financing. A business entity may be restricted to operating within the core business and not expand into unknown areas.

A low debt to equity ratio is favored by most creditors who are willing to provide more finances as per the need of the said company in the future.

The advantages are too many to ignore completely. The following attributes are sure to please the company owner:

First and foremost, of the benefits is the no-control by the lender option.

•  The relationship between the lender and borrower ceases with full repayment of the loan amount and interest.
•  The amount to be paid periodically can be calculated in advance, and the money arranged easily for the loan amount does not waver.
•  The interest is tax-deductible and offers respite to a small business owner.
•  There are a few downsides as well.
•  The necessity of paying off the debt can adversely affect the company\'s growth, especially when the profits have not been good.

An owner of an LLC or any other type of business entity may be forced to provide a guarantee, often relying on personal assets. The distinction between personal and company finances tends to become blurred as a result.

Equity Financing

This involves relinquishing a portion of the company\'s share to obtain the necessary funding. The lender can thus offer an opinion in all company matters. The business owner may present an excellent opportunity to the investor by providing a handsome ROI. Some of the benefits that are sure to come one\'s way by deciding to go with equity financing include:

•  No need for regular repayment of the money
•  No interest on repayment
•  Ability to grow the business as needed with no financial restraints.

The minuses are aplenty too, namely:

•  Sharing of profits with the investor
•  Allow the investor to participate in all company decisions and voice opinions

There are pros and cons for each type of financing. It is advisable to consult an experienced business financial advisor to get timely advice about the most suitable financing.