Is Debt Financing or Equity Financing Better For Your Business?

List: Posted: 12/10/10

When considering the financing options for your small business, you might consider the benefits of equity and debt financing.  Finding the solution that works for you can help you to better manage your business debt and find a more secure financial future. 

 

Put simply, debt financing is a simple way of taking out a loan that is held for a certain period of time, during which you pay the money back in installments. Debt financing can be either short term or long term.  Most banks will offer several options for small businesses to take out loans to help deal with debt, and this particular option allows the business to get help with less risk assumed. 

 

Many business owners prefer debt financing because the lending party doesn't stand to gain any part of the business and there is usually a fixed repayment schedule.  The main disadvantage of this option is that it can come with a very high interest rate.

 

Another way for businesses to deal with debt aside from debt financing is with equity financing.  This involves the business owner selling off an ownership interest in your business in exchange for money.  When compared to debt financing, there is less interest to pay, but the disadvantage of giving up partial ownership of your company.  Equity financing can be a great way to get access to the cash flow you need relatively quickly. 

 

Equity financing and debt financing both offer viable ways to get help with some of your business debt.  The main things to consider are the interest rates of debt financing and the fact that equity financing requires you to lose partial ownership of your business. with this in mind, you can make a more informed choice.

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