Starting a business is the most effective way to generate income fast. Many people, regular consumers and entrepreneurs alike, are reluctant to gamble on the idea due to the risks and complexities surrounding business creation and management. One particularly critical aspect that requires careful tackling is funding. Depending on the size and type of business, the capital needed may range from a few thousand to hundreds of millions of dollars.
Unless you have enough money to support the business, there are two funding options to choose from—debt financing or equity financing. Let’s face it, not very many people are capable of shouldering the entire expenses of a start-up business, and the least risky and quickest way to realize your plans is through extra hands. Nevertheless, you have to make sure that the financing option you will use fits your situation to avoid future backlashes. There’s no better way to determine which financing option works better for you than to compare their pros and cons.
As the name suggests, this type of financing involves borrowing from a lender. The lender could be a bank or a private financing firm. Whichever you prefer, the debt will come with certain terms and conditions, which detail the payment method, penalties, and interest rate. As with all kinds of funding solutions, debt financing has its share of benefits and drawbacks.
A lender earns from the interest of the loan; they don’t own a share stock in the business, and so you are in control of how you will spend the extra capital you owe them. Your only concern about their involvement is the payment of the loan. Unless you used the business, itself, as the lender’s security, which is very unlikely considering that you understand the repercussions of such a move, they can’t take over the business even in case of default.
Unfortunately, it can be tough to find a commercial property loan deal that suits your needs, especially if you have a poor credit rating. You also need to pay the loan plus the interest. If you fail to plan carefully, you’ll end up losing more than earning, and that could cause you to fall behind on payment, which leads only to a single direction—bankruptcy.
When you engage in equity financing, you are trading ownership of shares of your business for funding. Your target in this type of financing are anger investors and venture capitalists. These are individuals or entities that are looking for business with high growth potential.
One apparent advantage of equity financing is that you can find funding without borrowing and entering a long-term payment contract. Unfortunately, since you will be proposing the idea to more than one investors, collecting the funds may take some time. Furthermore, you are giving away ownership of the business, which include full control of operation.
Both financing options have proven useful to countless small and large businesses that are still in existence if not thriving today. By weighing your options properly, you can come up with a choice that will work for you. To be absolutely sure, though, consider partnering with an alternative funding solutions provider, such as IBN Direct, in finding the perfect source of fund for your business.