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How Debt Equity Financing Works

You may need to look for additional financing at specific stages of your business growth. In most cases, you will always be in need of money during the initial stages of your business. The reality on the ground is that getting money for small businesses is difficult. During the last few years, investors have scaled back from financing small businesses and traditional lenders have set up tighter lending rules.

There are different financing options that small businesses can go for. Two of the most common funding options are equity and debt financing. Before choosing either of the options, you should know how they work to determine which one would be suitable for you.

How Debt Financing Works
With debt financing, you are simply given a loan and have to pay it back with interest. Buying a home, a car or using credit card are common forms of debt financing. No matter where you get the financing from, be it a bank or from family members, you will be charged an interest.

Choosing debt financing for your business may be a wise choice for different reasons. To begin, the lender has no control of your business. When you pay back the loan, you will no longer have any obligation to the financer. Apart from this, the interest charged on the loan is tax deductible. Finally, you will have to pay back the loan in regular installments. Planning for your expenses over time becomes easy when you have regular payments to make.

Overview of Equity Finaning
Equity financing is not well understood as much as debt financing is. Equity financing mostly involves investors and this is why most people don’t understand it. With equity financing, you will have to give part of your company shares to venture capitalists or angel investors.

With equity financing, the investor takes all the risk of the business. In case your business does not end up breaking even, you will not have any money to pay back. Moreover, through the financing, you will have more cash at your disposal since there are no loan payments to be made. Finally, venture capitalist can provide you with advice and a platform to launch your business globally.

Which Funding Method Should You Choose?
When it comes to small business funding, you will not have a choice in most cases. It is not easy to get traditional financing when you are running a small business. On the same note, unless your business has a potential to go global, you will struggle to find angel investors interested in funding you. Investors will require a significant share of your company to fund you.

The above are the two main financing options that small businesses have.

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