When it comes to raising capital for your business, there are two main options: debt financing and equity financing. With debt financing, you must repay the money plus interest for a set period of time, usually in monthly installments. Equity funding, on the other hand, doesn't involve any repayment obligations, so you can channel more money to grow your business. Debt financing refers to obtaining a conventional loan through a traditional lender, such as a bank.
Equity financing involves raising capital in exchange for a percentage of the company's ownership. Finding what's right for you will depend on your individual situation. Equity financing involves the owner giving up part of the company. Unlike debt, equity financing does not require repayment.
Investors expect to get a return on their money by receiving dividends or an increase in the stock price of their investment. To obtain this capital, ABC Company decides to do so through a combination of equity financing and debt financing. Debt always involves some type of repayment with interest that must be made regardless of whether the company makes a profit or not. One of the most important questions to address before deciding to seek equity or debt financing is cash flow. Of course, the owners of a company want it to succeed and offer equity investors a good return on their investment, but without having to pay or charge interest, as is the case with debt financing. For example, if the ABC company decided to raise capital solely with equity funding, the owners would have to give up more property, which would reduce their share of future profits and their decision-making power. The benefits of debt financing are that you can get money quickly, you know exactly how much your financing will cost, and you can keep full ownership of your company.
However, if equity funding is the difference between your company's success or failure, it's worth giving up some of the control. The downside of debt financing is that you have to bear the cost of a loan and make an interest payment every month, but this may be the best option if you're not willing to donate a percentage of “your baby”.Unlike debt financing, in which you borrow money that must be repaid with interest, equity financing involves the sale of company shares, making investors partial owners. On the contrary, if they decided to use only debt financing, their monthly expenses would be higher, leaving them with less cash available for other purposes, as well as a greater debt burden that they would have to repay with interest. The debt-to-equity ratio shows how much of a company's funding comes proportionately from debt and equity.
Most companies use a combination of debt and equity financing, but both have some clear advantages. Raising money for your company and finding the right type of funding can be time consuming and stressful. With debt financing, you'll save a lot of time and receive the money relatively quickly, usually within a few days or weeks. Obtaining financing through capital can be a simpler process than financing through debt, but it is necessary to have an extremely attractive product or financial projections, in addition to being able to transfer part of the company and often good control.
