123ArticleOnline Logo
Welcome to 123ArticleOnline.com!
ALL >> Debt >> View Article

Debt Vs Equity Funding

Profile Picture
By Author: Carolyn Clayton
Total Articles: 174
Comment this article
Facebook ShareTwitter ShareGoogle+ ShareTwitter Share

So you've just sorted all your ideas, hopes, predictions and forecasts out and turned them into your business plan. You're now ready and armed to pursue some business funding. So what business funding is available to you?

There are two main categories that you need to know about when it comes to business funding; Debt Funding and Equity Funding. Both of these finance options have their advantages and disadvantages; making it easier to find the one that fits your business in the best ways.

The term debt funding refers to money that it borrowed and has to be repaid over a period of time, this is normally re-paid with interest. This debt funding can either be short term or long term. In a short term sense the full amount to be repaid is done so within a year. In a long term sense the repayments will go on for over a year. With debt funding your only obligation to your lender is to pay back your loan. However in the case of smaller businesses guarantees will probably be needed; making commercial debt funding almost the same as personal debt funding. Debt funding comes from resources such as banks and traditional lenders. ...
... With debt funding you will have to make re-payments monthly, which will include interest.

The term equity funding is the exchange of money for a share of business. This allows you to obtain funds for your business without incurring any debt. Selling equity means taking on investors. Many small businesses raise equity by bringing in investors to make their business succeed and get a return on investment. The two main types of equity funding are business angels and venture capitalists.

The advantages of Debt Funding are:

Don't have to give up ownership/future profits of your business. Your lender has no control of the running of your business
Using borrowed money to get your business assets will allow you to keep your business profit in the company meaning you can use this profit to pay a return to owners of the company.
Interest is tax deductible

The disadvantages of Debt Funding are:

Too much debt may impair your credit rating
Use profit to pay back debt means if you have a lot of debt all your profit will be used to repay it, leaving nothing to show for your hard work
Must have sufficient cash flow in your business in order to repay loans
The riskier the loan the higher the interest rate
Debt funding can require collateral to secure your loan, which will be seized if you can't repay your debt.

The advantages of Equity Funding are:

You do not have to pay back your investors even if your company goes bankrupt
Business assets do not have to be pledged as collateral to obtain equity
Businesses with sufficient equity will look better to lenders, investors, etc
Your business will have more cash available because it will not have to make debt payments

Disadvantages of Equity Funding are:

You will have to relinquish ownership and a share of your businesses profit to other investors
Other owners may have different ideas than yours on how businesses should be run
Payments to investors in C-corporations are not tax deductible

Total Views: 276Word Count: 535See All articles From Author

Add Comment

Debt Articles

1. How To Choose The Best Elementary School For Your Child In Canada
Author: USCA Academy

2. Why Personal Loans Are The Best Option For Vacation Financing
Author: Brajendra Kumar

3. How To Improve Your Home Loan Eligibility Calculation
Author: Maya

4. How Personal Loans Can Help In Debt Consolidation And Financial Planning
Author: Brajendra Kumar

5. Repayment Options And Plans
Author: Brajendra Kumar

6. Navigating Bad Credit Car Loans In Ottawa: A Comprehensive Guide
Author: Anna Emma

7. Understanding Personal Loan Interest Rates
Author: Brajendra Kumar

8. Dynamics 365 Business Central Online Training | D365 Business Central
Author: Susheelvisualpath

9. Why You Should Review Your Home Loan Periodically?
Author: Tarun Diwedi

10. How Personal Loans Can Help You In Financial Emergencies
Author: Brajendra Kumar

11. Usmle Training Step By Step By Themet World
Author: themet

12. Unlocking The Secrets Of Itin Application: A Comprehensive Guide To Documents, Costs, And Requirements
Author: itin.support

13. 5 Smart Ways To Get Out Of The Debt Trap
Author: Brajendra Kumar

14. Sole Traders And Bounce Back Loans: What To Do When Repayment Seems Impossible
Author: Shira Joseph

15. Hybrid Dynamics: Exploring The Intersection Of Physical And Virtual Experiences
Author: adlerconway

Login To Account
Login Email:
Password:
Forgot Password?
New User?
Sign Up Newsletter
Email Address: