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Financing your Small Business: Choosing between equity and debt

Your business has been growing at a steady rate and you concluded that seeking outside financing is the best strategy for your business. You are confident that you will be able to access sufficient financing from outside investors, so what should your strategy be: debt or equity?

Questions for you to consider:
·         How much money does the business need?  
·         What types of expenditures will be made with the money?
·         How and when will the business pay back the money and any associated interest or return?
·         What types of financing may be available for the various stages of development of a business?

Advantages of Debt versus Equity
·         Debt does not dilute the entrepreneur’s ownership position in the business.
·         The lender is only entitled to repayment of the debt plus agreed-upon principal plus interest payments and has no claim on future profits of the business.
·         Interest on the debt is a deductible expense of the business for tax purposes.

Disadvantages of Debt versus Equity
·         Debt, unlike equity has to be repaid on a specific schedule.
·         Interest is a fixed cost, which raises the company’s break-even point. High interest costs during difficult financial periods can increase the risk of insolvency.

Typical uses for debt financing
·         Short-term debt is used to finance assets that can be made liquid quickly (turned back into cash) – examples include accounts receivable amounts, tax credits, newly signed contracts and inventory.
·         Long-term debt or term loans are used to finance assets with longer lives, such as capital equipment or the purchase of land and construction of a plant or building.

Typical uses for equity financing
·         Equity investment is usually required to fund the startup losses of a business as there is no track record of or any certainty that business will generate cash flow to fund debt and interest payments.  
·         Venture capital (VC) investors only invest in high-growth potential businesses that require a minimum level of capital (varies by firm, available on VC firm’s website).


In Conclusion, The most important thing to remember is  to do your research so you don't end
up losing time and money.

Charles Colbert is The Co-Founder and Managing Director of iSmallBizCredit. 
He can be reached  by telephone at 646-762-1268 or 862-236-5725.

Website: www.ismallbusinesscredit.com
Facebook Fan Page: www.facebook.com/pages/Ismallbusinesscredit
Twitter: @ChazzScot (https://twitter.com/ChazzScot)






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