How To Finance Your Business Idea? By Afshin Afsharnejad
You’ve supposed that pursuing outside investment is the best financing plan for your business. According to Afshin Afsharnejad, you are sure that you will be capable to access adequate financing from outside investors, so what should your approach be: debt or equity?
Advantages of debt versus equity
The entrepreneur’s ownership position in the business does not deteriorate due to debt.
The lender is only permitted to the repayment of the debt plus agreed-upon principal plus interest charges and has no claim on future returns of the business.
Tax-deductible expenses for businesses include interest on the debt.
Arranging debt financing is less complex because the company is not needed to capitulate to federal and regional securities laws and regulations.
The business is not needed to send updates to shareholders, set shareholder meetings, and pursue the vote of shareholders before taking specific activities.
Disadvantages of debt versus equity
Debt, unlike equity, has to be compensated on a detailed schedule.
Interest is a hard-and-fast cost, which increases the company’s break-even point. High-interest expenses during hard financial periods can raise the menace of insolvency.
Cash flow, to protect both the operational costs of the business and the principal and interest payments is needed and must be planned for appropriately.
A business with a larger debt/equity ratio is supposed riskier by lenders and investors. Accordingly, a business is restricted as to the quantity of debt it can carry.
Company assets are often pledged as collateral to lenders, and business owners may be required to personally guarantee the repayment of the loan and interest.
Typical uses for equity and debt financing
Short-term debt is used to finance investments that can be liquidated quickly — examples include accounts receivables, tax credits, recently signed contracts, and inventory.
Term loans are typically used to finance assets with longer lives, such as capital equipment or the purchase of land and construction of a building.
According to Afshin Afsharnejad, startup losses are usually funded by equity investment since there is no track record or any certainty that the business will generate cash flow to pay debt and interest.