Wondering how to get money for a new business? Our experts explain the difference between debt financing and equity financing.
You’re ready to launch your new business idea, or maybe you have grand plans to grow your existing business. Either way, you’re going to have to finance it.
Finance is crucial in just about every business decision, from planning and budgeting all the way to your capital structure and how you control the risks and costs. Once you’ve strategically planned your business structure and business goals, it’s time to think about how you’re going to get funding for your new business.
There are two main routes to business funding – equity financing, where you raise equity capital from investors, and debt financing, where you take out a loan. Below, our experts explain equity financing vs debt financing:
What is debt financing?
Debt financing can be secured or unsecured, with secured loans attached to a fixed asset, such as your property. An advantage of debt financing is that you’re not losing ownership in the company.
How does debt financing work?
Once you repay the loan back to the lender, your relationship ends. In addition to this, it’s relatively easy to forecast your expenses as your monthly repayments do not fluctuate. You also know how much you’re paying in advance (unless there are changes to your loan).
There are various ways in which you can acquire debt financing, including approaching a bank or lender directly and securing a loan. However, debt financing can also be in the form of getting a loan from your friends or family.
What is equity financing?
Equity finance is when money is exchanged for part ownership of your business. This is usually done by investors, but some other sources of equity finance are crowdfunding, venture capitalists and public listings:
What is crowdfunding?
Crowdfunding is when you finance your business through loans, donations, or you exchange money for gifts or shares. Traditionally, if you wanted to raise capital to start a business you would get everything together (marketing plan, business plan, market research, prototypes etc) and approach other businesses to invest in your idea.
Crowdfunding gives the entrepreneur a single platform where they can build, showcase and share their pitch resources. The reach is also wider as you have access to thousands of accredited investors who can see, interact with and share your fundraising campaign.
What is public listing?
One of the main advantages of a public listed company is that anyone can invest in the company, meaning that more capital will be generated in comparison to a private listed company.
What is venture capital?
A form of private equity, venture capital is a type of financing that investors provide to start-up companies and small businesses who have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions.
What are the advantages of equity financing?
One of the main advantages of equity financing is that you’re under no obligation to repay the money that you’ve acquired through the investors, so there’s no additional financial obligation on you as a business owner. As there are no monthly repayments associated with this type of financing, you as a business owner have the ability to focus on dollar productive tasks and invest in growing your business.
