When you’re a business owner, you have a ton of responsibilities you have to keep up with each and every day to ensure your business is a success. However, one of the most important tasks you can undertake involves understanding the difference between the different financial options available to you and how they’ll impact your business in the coming months and years. For many new business owners, the differences between equity longs and debt financing can prove to be some of the most troublesome and elusive. However, a little research can help to clear up any misunderstandings rather quickly and simply:
When you use debt financing in order to fund your business’s growth or operations, you’re borrowing cash from your bank or another lender, and are required to pay it back at a later date, usually in monthly installments over a set number of months. This is completely different than the process used when you opt to utilize equity loans. Those you borrow money from provide you with the investment you need, and in turn buy an agreed-upon portion of your operations. In most cases, you won’t even need to repay this initial investment sum even if your business ends up going under.
Risks and Benefits
Both equity loans and debt financing have their own distinct pros and cons that should be considered as they apply to how your business operates financially. When you choose to sell equity in your company, you’re able to get the cash you need to keep moving forward without taking on a huge burden of debt. However, this could also mean giving up a significant amount of control in your company in some cases, which can spell disaster down the line.
Debt loans, on the other hand, allow you to maintain full control of your business and day-to-day operations. You’ll never need to worry about another party interfering with your plans in the future. However, this does mean that you’re saddled with a monthly debt that will cut into your cash flow each and every month. This can be particularly tough on new businesses, regardless of which industry they’re working in.
Keeping these difference in mind is crucial if you’re looking to make the most of your business’s finances in the coming months. Speaking to a professional can help you understand whether or not equity loans are the right option for your business, and determine how it’ll impact your finances moving forward to help your business become a household name, with strong, deep roots in your niche.