Debt Versus Equity Financing Pros And Cons | All You Need To Know

In this video I discuss the pros and cons of debt or equity financing for any business. It is key that we understand how these forms of financing affect our business in making key decisions on how to use it.

You can raise financing to cover early-stage business growth and cash flow issues until the business becomes self-sustaining debt financing and equity financing are two typical forms of financing you can do at the small business level debt financing means borrowing money and promising to pay back with interest in the future equity financing means someone is putting

Money or assets into the business in exchange for some form of percentage of ownership let us look at these two closely and examine some pros and cons of both first advantage of equity less risk you have lower risk with equity financing because you do not have any fixed loan payments to make this is helpful with startup businesses that might not have positive

Cash flows during the early months point number two available despite credit problems if you have personal credit issues equity financing may be the only choice that you have for funds for growth even if that financing was offered the interest rate might be just too high for you to afford and something that wouldn’t even be acceptable number three cash flows equity

Financing does not take funds out of the business this loan repayment takes fans out of the business so what that means is that it reduces the money available to finance growth number four long-term planning equity investors do not expect to receive an immediate return on their investment they have a long-term view and also face the possibility of losing their

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Money if the business fails disadvantages of equity number one it’s quite expensive equity investors do not expect to receive a return on their money the business owner must be willing to share some profits of the company with equity partners the amount of money paid the partners could be higher than the interest rates on the debt financing and obviously there

Would be profit sharing and ownership equity sharing as well which could actually stack up in terms of financing and money in terms of payouts as well number two loss of control the owner has to give up some control of his company when he takes on additional investors equity partners want to have a voice in making decisions especially the big ones number three

Potential conflicts all partners will not always agree when making decisions these conflicts can erupt from different visions for the company and disagreement or management styles an owner must be willing to deal with these differences of opinion advantages of debt number one control taking out a loan is temporary the relationship ends when the debt is repaid

The lender does not have any say in how the owner runs his business number two taxes loan interest is tax deductible whereas dividends paid out to shareholders are not number three predictability principal and interest payments are stated in advance so it is easier to work these into the company’s cash flow loans can be short term medium term or even long term

Disadvantages of debt number one qualification the company and the owner must have acceptable credit to qualify number two fixed payments principal and interest payments must be made on specified dates without fail businesses that have unpredictable cash flows might have difficulties in making loan payments the clients in sales can create severe problems in

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Loan payment dates number three cash flow taking on too much debt makes the business more likely to have problems meeting loan payments if cash flow declines investors will also see the company as a higher risk and be reluctant to make additional equity investments number four collateral lenders will typically demand that certain assets of the company be held

As collateral when looking for funds to finance a business an owner must carefully consider the advantages and disadvantages of taking out loans and seeking additional investors it’s very crucial guys the decision involves weighing and prioritizing numerous factors to decide which method will be best suited for long-term financial gain but remember a missed

Opportunity often ends up costlier than an expense saved

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Debt Versus Equity Financing Pros And Cons | All You Need To Know By Nana Safori