Differences between Small Business Financing: Debt and Equity

by Justin Weinger on August 21, 2013

There are some people out there who have the initiative and the drive to become a leader, and even to be their own boss someday. The world needs people like that, and if you think you’re one of them, then there are some things you should know about being your own boss. Some of which has to do with starting your own business—building a product you can produce and figuring out how to finance the business built for your product.

Usually, people can go one of three ways: using their personal finances, borrowing money, or looking for investors.

Financing with Debt

The first two options tend to lead oneself into the same outcome: dealing with debt problems. When using your own money, you may find yourself with expenses you didn’t prepare for. Even someone great with managing money can find themselves with unpredictable costs. If you don’t have many employees, you may need to find some, and without knowing these people personally, you either go through a recruiting agency or a freelancing network.

Finding employees will be just one of your unknown costs, especially when using an agency or negotiating with freelancers’ rates. If you find yourself burning through savings or the funds built to start your business, you may want to get some counselling before you start discovering debt problems. Consolidated Credit offers credit and debit counselling and helps people build strategies to control their personal finances. If you won’t be using your own income but are looking to borrow money, that’s another tricky option.

Borrowing money usually means taking a loan from a bank or some other financial institution that will fund your business. You may have seen people getting business loans in film or on TV, and it’s usually one of the more straightforward ways of financing a start up business. There are some tips on how to get a business loan, such as having good credit and a game plan for your business. Some small business owners may turn away from borrowing money because of the debt they are automatically incurring with a business loan.

Aside from the debt that can be induced through borrowing money, there are several advantages to doing so. When using a business loan, as long as the funding is in your name, then all of the money put into a business is yours, and therefore, you retain full ownership at all times. You even keep control of your business if you default a loan, as long as you back it up with collateral. Additionally, borrowing money is a great way to build credit and what a way to build it by starting a business.

Getting Investors in on the Ground Floor

When you’re using equity financing to start a business, this usually means you are bringing in investors or even potential partners who will provide you with the funding needed to get your business off the ground. This doesn’t take away the debt though; it is simply replaced with non-monetary means or finances. Usually, making an investment means the investor expects a profit or some form of return. A lot of people are learning about this through crowd funding and providing incentives.

Funds that are invested do not need to be paid back, usually, and you don’t necessarily need to back up your company with a well-known name or history. Again though, a game plan is a good tool to have prepared to show off your business and its products/services. Many small business owners are drawn to equity financing because of the savings it will bring their personal finances. However, by going through investors, you risk losing control of your business.

As noted above, an investor usually wants an incentive or reward, usually coming in the form of a share of the company. This gives that investor power over the choices made for the company because they share some of the ownership. Most investors can be large influences on a business board, simply due to how far their hands are dipped in the pot. However, a strong and smart business partner or investor can not only help you fund a business, but can give you direction you never saw as an option. Even Kings had counsels.

Starting a business is costly, and all forms of financing has its own form of pros and cons. You just need to be prepared for the outcome and the debt you may owe, or the people you’re indebted to.

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