Debt and Equity Financing

Debt and equity financing are 2 main options for small businesses to raise money for new projects. Equity financing is selling some percentage of your business to third party to raise money. Equity financing is good especially at the beginning of the business when you need money and don’t have too much options to raise money. And also when the business or new project is too risky equity financing will be better way to finance project. Because if company goes to bankruptcy, equity holders are the last ones to get money. Companies raise funds through debt financing by selling bonds, bills or notes. The amount of the borrowed money has a due date that company has to pay it back. The cost of the equity is dividend payment to shareholders, whereas cost of debt is interest payments. Both methods have its positive and negative sides.

The biggest advantage of equity financing is that company may save more amount than debt financing. Because it doesn’t have to pay interest for that. Moreover, with right investors company may grow even rapidly to reach top levels. And just in case if company fails, owners don’t have to pay to back investments. Negative side of this method is that investors will have some part of your business, and every time before making a decision you will have to talk to them. Furthermore, it takes a bit more to find investors with this method.

Unlike equity financing, in debt financing as an owner you have full rights over the investments. So you can spend that raised money as you wish without consulting to investors. Business size doesn’t matter for debt financing. It is available to any type of business size. Interest charges are tax free and you are only required to pay back your loan without sharing any profits of your company. Even if debt financing is available to all businesses, credit score and financial situation of company decided the amount of debt they can get. And if company fails to repay its loan business assets can be seized.