By , Jared Hecht
Published July 19, 2016
Your small business needs extra capital. Should you take out a business loan or look for an investor? Figuring out how to finance your business is an important decision that can have big consequences. So which is better? Debt or equity?
Let’s quickly go over their differences, then talk about how you can make this big decision.
Essentially, debt financing is where you borrow money from a lender that you’ll eventually pay back, plus interest. If you’ve ever taken out a loan, you’ve financed something with debt.
Related: 4 Lessons Learned in Getting Bank Financing
Equity financing is where you trade ownership of your business to angel investors or venture capitalists -- in return for their capital.
Equity is especially important for certain industries and kinds of businesses, like technology startups and companies with global aspirations. Almost $60 billion in venture capital was invested across the United States in 2015.
Related: Financing Face-Off: Debt vs. Equity
If you’re having trouble deciding between debt and equity financing, here are five questions to ask yourself.
If you need cash as soon as possible, then debt financing is the way to go. You can get business loans incredibly fast -- in a matter of hours even, if you apply to the right lenders. Meanwhile, equity financing involves finding the right investors, pitching your business, drawing up the legal documents and more.
However, if you’re not in a big hurry, either option can work for you. The biggest and most affordable loan options -- like a SBA loan -- will probably take around as much time as equity financing.
If you don’t need a lot, or you’re only looking for a small amount, then debt financing is the better choice. Equity financing rarely comes in small amounts, but you could get business loans for as little as $10,000 or less.
Even if you’re looking into early-stage investors, they’ll often look to spend $300,000 or more -- in return for as much as 50 percent equity. But if you could use more cash, like hundreds of thousands or even millions, then again, either debt or equity could be right for you.
Related: A New Kind of Financing That Doesn't Involve Taking on Debt or Giving Away Equity
If so, equity is probably for you. Debt financing is transactional. You borrow, then you pay back what you owe. Equity will give you access to an investor’s knowledge, contacts and expertise. You get to establish a relationship that could have a hugely positive effect on your business -- as long as you’ve partnered with the right people. If all you want is more cash in your bank account, then it might be best not to get involved with investors.
Some entrepreneurs prefer to keep their businesses to themselves -- and that’s okay. If you don’t want to lose control over how your business operates, then equity financing isn’t the way to go. If you’d welcome the experience and expertise of an investor, or if you’re more concerned with funds than ownership, then either path could work.
Angel investors and venture capitalists often look for companies with the potential to grow into national brands or global businesses. If that’s your goal, then equity can help you get there. However, plenty of entrepreneurs prefer to run a local business, staying small because they like the individuality, autonomy and community aspect. If you fit that mold, equity probably won’t be an option.
Finding the right kind of financing is a big deal, and it can have a deep and lasting effect on how your business runs. Also, don’t discount combining debt and equity financing, according to what you need at the time. Plenty of businesses make use of both.
https://www.foxnews.com/us/debt-vs-equity-financing-which-way-should-your-business-go