Equity vs. debt: which is a good start for business? This is one of the most common questions that come to mind when someone starts a business. The answer to this question depends on a number of factors such as economic climate, the business’s existing capital, and business niche.
In this article, you will find which one is best to start a business. But first, we discuss both terms in detail to have a better understanding.
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Equity and Debt: Meaning
Equity: Refers to the stock to finance
Debt: Refers to the bonds to finance
We recommend going through both terms if you are not familiar with them.
When discussing equity vs. debt: which is a good start for business, let’s discuss both terms in detail.
Debts are money you borrow directly from financial institutions or elsewhere to start your business. Whereas equity means selling a stock in your company in the hope of securing financial backing.
Every business, whether it is small or large, requires financial help to start or keep the business running. There are good chances of a successful business if you have good funding options to start your business. Several financing options for small businesses include bank loans, crowdfunding, and venture capital.
Equity vs. Debt: Which Is A Good Start For Business? Learn in the following section.
What is equity?
Equity financing means selling a stake in your company to investors who want to share in the future profits of the business. This is a long-term process, and there are several ways to equity financing, such as equity crowdfunding or dealing with venture capital.
People or companies who invest in the business and own shares in the business become the partial owner and are entitled to a portion of the company profit.
There are different types of equity financing
- Angel investors
- Venture capitalists
- Equity crowdfunding
Like any other financing option, equity financing also has pros and cons. If you are considering equity vs. debt: which is a good start for a business, you must know the advantages and disadvantages of equity financing.
Advantages of equity financing
- Rapid scaling
- No repaying until the company earns a preferable profit
- Most suitable for startups in high-growth industries
Disadvantages of equity financing
- Hard to obtain
- Investors’ involvement in the company’s operations
Equity vs. debt: which is a good start for business, is really confusing until you do not know the meaning of both terms. Hopefully, you understand the meaning of equity financing. The meaning of debt financing will make it more clear.
What is debt financing?
Most of us have borrowed loans once in our lifetime, which might be for any reason, to buy a car or for tuition fees. Debt financing is common among ordinary people, and debt financing for business is the same.
Businessman borrows funds from outside sources and promises to repay in installments adding interest to the principal amount and keeping some assets for collateral as reassurances to the lender.
Collateral can be anything like real estate, accounts receivable, insurance policies, or equipment, which can be used as repayment in the case of default.
Equity vs. debt: which is a good start for business will be clear soon.
There are different types of debt financing
- Traditional loan
- SBA loans
- Lines of credit
- Business credit cards
- Merchant cash advances
Advantages of debt financing
- Easy to approve
- No lender involvement in the company
- Tax-deductible interest payments
- Clear and finite terms
Disadvantages of debt financing
- Interest rates
- Quick start to repayments regardless of profits
This is the simple difference between debt and equity. Hopefully, you get a clear understanding of both the terms. Now, this is the right time to understand equity vs. debt: which is a good start for business?
Equity or Debt: which one should you prefer?
Ultimately the decision of choosing between equity and debt depends on the type of business and your needs. Before choosing the one, think about the pros and cons. If you choose equity, get ready to share the involvement of investors in the company’s operations and share future profits.