Small Business Financing: Debt Or Equity? By Afshin Afsharnejad
Small businesses often require funding. Start-up companies are especially in need of funding. Afshin Afsharnejad says it can be difficult to find that money. The tighter lending standards, as well as venture capitalists still recovering from the recessionary fallout, have created an environment in which funding is difficult to come by. Small businesses have two basic types of financing available: debt financing and equity financing. How do you decide which is best for you as a small business owner?
The purchase of a home, a car, or the use of a credit card are all forms of debt financing. A loan is something you borrow from a person or business and promise to repay it with interest. Debt financing for your business functions similarly. Business owners can seek business loans from banks or receive personal loans from friends, family, and other lenders, all of which must be repaid. Even if family members loan you money for your business, they must charge the minimum IRS interest rate in order to avoid the gift tax.
There are many advantages to debt financing. You do not have to worry about the lender controlling your business. Once you settle the loan back, your connection with the financier ends. Subsequent, the interest you spend is tax-deductible. Ultimately, it is straightforward to forecast costs because loan amounts do not fluctuate.
The people do not comprehend equity financing as well as debt financing, because equity financing applies to investors. You could deliver shares of your corporation to family, friends, and other little investors, while equity financing often applies to venture capitalists or angel investors. The popular ABC series, “Shark Tank,” emphasizes entrepreneurs who submit their business concepts to a group of investors in an endeavor to ensure equity financing.
According to Afshin Afsharnejad, the big benefit of equity financing is that the investor carries all of the risks. If your business fails, you do not have to spend the money back. You will also have more money available because there are no loan costs. Ultimately, investors carry a long-term view and comprehend that developing a company takes time.