Menu
Investing and Finance
Corporations Kicked From The Dow Jones
5 Most Overpriced Car Repairs
6 Ways To Make Your Home More Enticing To Buyers
Cars That Depreciate The Least
How To Cash In Your Heirlooms
Expensive Ways To Celebrate Halloween
Child Care Across The Country
Don't Sacrifice Saving Just For The Economy
Know Your Rights At Work
Emergency Funds That Are Right For Your Tax Bracket
How Much You Should Pay Your Kids For Allowance
How To Avoid Going Broke After Retirement
The High Price Of Speeding
Securitizing Your Health With ACOs
Obama And Romney's Education Policies Compared
The Benefits Of Retiring Later
The Hidden Costs Of Thanksgiving Dinner
Is The IPad Mini Worth The Money?
How Divorce Can Adversely Affect The Economy
Why Insourcing Is Appealing To Businesses In 2012
College Degrees Of The 1%
Best Layaway Plans For 2012
The Best Applications For Online Trading
5 Career-Changing Mistakes
Small Business Financing: Debt Or Equity?
Small businesses often need money. This is especially true for companies in the beginning stages of development. Finding that money can be difficult. Tighter lending standards and venture capitalists still recovering from the recessionary fallout are producing an environment in which funding is a challenge. There are two basic types of funding available to small businesses - debt financing and equity financing. As a small business owner, which is best for you?

Debt Financing
Purchasing a home, a car or using a credit card are all forms of debt financing. You are taking a loan from a person or business and making a pledge to pay it back with interest. Debt financing for your business works in a similar way. As a business owner, you can apply for a business loan from a bank or receive a personal loan from friends, family or other lenders, all of which you must pay back. Even if family members lend you money for your business, they must charge the minimum IRS interest rate in order to avoid the gift tax.

The advantages of debt financing are numerous. First, the lender has no control over your business. Once you pay the loan back, your relationship with the financier ends. Next, the interest you pay is tax deductible. Finally, it is easy to forecast expenses because loan payments do not fluctuate.

The downside to debt financing is very real to anybody who has debt. Debt is a bet on your future ability to pay back the loan. What if your company hits hard times or the economy, once again, experiences a meltdown? What if your business does not grow as fast or as well as you expected? Debt is an expense and you have to pay expenses on a regular schedule. This could put a damper on your company's ability to grow.

Finally, although you may be an LLC or other business entity that provides some separation between company and personal funds, the lender may still require you to guarantee the loan with your family's financial assets.

If you think debt financing is right for you, the U.S. Small Business Administration works with select banks to offer a guaranteed loan program that makes it easier for small businesses to secure funding. Go to the SBA website to learn about those programs.

Equity Financing
The public does not understand equity financing as well as debt financing, because equity financing involves investors. You could offer shares of your company to family, friends and other small investors, but equity financing often involves venture capitalists or angel investors. The popular ABC series, "Shark Tank," highlights entrepreneurs who present their business ideas to a group of investors in an attempt to secure equity financing.

The big advantage of equity financing is that the investor takes all of the risk. If your company fails, you do not have to pay the money back. You will also have more cash available because there are no loan payments. Finally, investors take a long-term view and understand that growing a business takes time.

The downside is large. In order to gain the funding, you will have to give the investor a percentage of your company. You will have to share your profits and consult with your new partners any time you make decisions affecting the company. The only way to remove investors is to buy them out, but that will likely be more expensive than the money they originally gave you.

Which Funding Method Should I Choose?
Often you will not have a choice. Formal equity financing is difficult to secure especially for small, early-stage startups. Venture capitalists are looking for companies with global reach. Angel investors, those who fund on a smaller scale, are often looking to invest a minimum of $300,000 and possibly a 50% stake in the company, especially if it is in the very beginning stages, according to an article released by Entrepreneur.com. If your company is a startup serving a local market and does not need large-scale funding, debt financing is probably your best, and perhaps only, option.

Larger startups often combine debt and equity financing to reduce the downside of both types.

The Bottom Line
The type of financing you seek depends largely on your startup. If you are just getting started, consider a loan from family, friends or a bank. As you grow and reach a larger market, equity funding may become a more viable option if you are willing to give up a portion of your company.

Print
6 U.S. Cities With The Most Expensive Parking Spots
Options For Last-Minute Thanksgiving Traveling
4 Big Businesses Built With Small Cash
Why More Americans Are Working From Home
Top Jobs For Tips
Christmas Gifts That Can Teach Your Child About Finance
How To Create A Financial Bucket List
Advantages And Disadvantages Of Using A Mortgage Broker
Small Business Financing: Debt Or Equity?
Best Cyber Monday Deals For 2012
5 Things You Need To Know About Obamacare
The Rise Of For-Women Advisor Practices
Why Cyber Monday Is Better Than Black Friday
Is Cyber Monday The New Black Friday?
How To Monetize Your YouTube Channel
5 Ways To Make Your Home Remodels Pay Off
How To Use The 4-Box Strategy For Retirement Income
Beware These Disaster-Related Scams
3 Jobs Few People Want
Average Cost Of An American Christmas
How To Make Your Holiday Giving Count
3 Best And Worst Gift Cards For 2012
What Lotto Winners Spend Their Money On
Is Striking The Best Option?
Share 0 Disqus Biggest Layoffs Of All Time
Overlooked Tax Deductions For 2012
How To Succeed In Your Next Performance Review
The Finances Of The Global Middle Class
Menu
Reasons Not To Change Careers In 2013
Tax Advice For Victims Of Superstorm Sandy
3 Richest Pirates Of All Time
6 Small Business Tax Changes For 2012
How Disasters Can Benefit Small Businesses
Things You Didn't Know Could Get You Fired
How To Pick Valuable Online Classes
The Best Black Friday Deals For 2012
Does Black Friday Shopping Really Save You Money?
U.S. Cities With The Largest Parking Fines
When Young Athletes Receive Too Much Money Too Soon
How To Select A Financial Advisor
Why You Should Christmas Shop Early
Tax Credits For Families
Ways To Get Free Christmas Gifts
5 Most Expensive Cities In The U.S. For Car Insurance
4 Most Expensive Cities In The U.S. For Gas
Stores That Start Black Friday Sales Early
How To Decorate For Christmas Without Going Broke
Why The Price Of Crude Oil Is Dropping
Reasons Renting Is Better Than Buying
5 Top Ways New Advisors Can Land Clients
8 Software Skills Currently In Demand
How To Make Extra Money At Christmas Time