Equity versus debt funding
All methods of finance have disadvantages and advantages. Here’s some things to consider:
Pros and cons of debt finance
Debt finance is funding borrowed that is repaid with interest over a set period, such as a traditional bank loan.
- You retain control of the business and are not obliged to share profits with investors
- Interest fees and charges on business loans are tax deductible.
- The loan must be repaid to a fixed timescale, with payments beginning upon approval, so you will need to generate enough money to cover these expenses
- Failing to make repayments on time can impact your credit rating
- Banks can be conservative lenders, making it difficult for new businesses with novel ideas
- Loans secured against your home or assets can leave you exposed.
Pros and cons of equity finance
Equity finance involves taking on investors in exchange for a stake in the business or agreed returns.
- Your business has time to find its feet, as the investor/s do not usually require returns immediately
- This frees up more working capital to cover any cash flow issues as money is not being directed to repayments
- Bringing the right investors on board can add to the skills, connections and, ultimately, success of your business.
- Investors will want a stake in your business and a voice in management decisions, along with eventual returns on their investment
- Taking friends and family on board as investors can impact on personal relationships
- Finding the right investors (along with making sure you have all the facts and figures in place to make you “investment ready”) can be very time consuming.
They both have pros and cons, but be aware that failed loan applications may go on your business’s credit record, so prepare carefully.