Debt or Equity Financing | IPass Loans
If you’re a company owner in need of an infusion of capital, you generally have two options: debt or equity financing. It’s when you borrow money from outside sources and agree to repay the loan with interest on a specific date in the near future. Equity financing is the process of investing money or assets into the company in exchange for a certain proportion of ownership. Each type of financing has pros and cons based on the needs of your business, get Ipass Loans Need Money Now.
Before you decide which one is best for your company and take a look at these four questions:
1. How quickly do you require money?
If you use credit financing, you’ll be able to reduce the time spent and will receive the funds rapidly, usually in just a few days or several weeks. You can also utilize financing in the long or short-term. The short-term financing is revolving and is utilized for things such as inventory or material costs. The long-term financing of debt is referred to as an installment and usually helps finance equipment, machinery, or startup costs. For debt financing, the terms are clear and clearly laid out in the beginning. You are aware of the amount you’ll need to repay and when.
Equity financing is more complicated. Investors and business owners discuss back and forth the terms of the investment deal, such as how much of a stake is to be offered in exchange for financing as well as how many discussions are held about the potential value of the company. If you’re working with multiple investors with different views on the value that they think it will ultimately be could cause things to become more complex and, consequently take even longer negotiations. In addition, there’s more legal paperwork involved when it comes to equity financing, which also makes it the most time-consuming option.
2. Do you wish to keep total control over your company?
Debt financing lets you retain control over your business. The lenders don’t need an interest in your business and only want the confidence that you’ll be able to pay back the loan. The disadvantage of debt financing is that you’re liable for the expense of a loan and paying the interest every month, but this could be the best alternative if you’re unwilling to offer a portion or a percentage of “your baby.”
If you choose to finance your equity means that you lose control over a small portion of your business. Based on the terms of the agreement the investors could end up controlling most of the venture which means that eventually, you may be disqualified from the company you started.
If equity financing is the difference between your company being successful or not it’s worth letting go of some control. Imagine this in this manner What would you rather own an 80percent of something or the entirety of nothing? Furthermore, with equity financing, you’re not only trading the control of your company, but the future value so is aware of that. A 10% stake in a company worth $100,000 may seem less important than losing a similar percentage of a company valued at $10 million.
3. Do you meet the requirements for the kind and amount of funds you require?
One of the most important issues to be addressed prior to deciding whether you want to pursue the option of debt or equity finance is your cash flow. Are you in possession of it? Which phase are you currently in, and what is the financing you can get to fund that phase?
When you finance your business with debt the lenders will look at your ability to pay back the amount borrowed and also the interest. They’ll look at not only the sustainability of your business as well as the financial stability of the person who is borrowing. What do they do? Let’s see:
LENDERS LOOK AT THE FIVE C’S OF CREDIT TO DETERMINE YOUR CREDITWORTHINESS:
- Personality: What experience do you bring as an owner of a business? Have you ever filed for bankruptcy before?
- Credit What have you done with credit? How do deal with credit before?
- Capacity Are you in a position to pay?
- Collateral How can you promise to back the loan?
- Terms: What are the economic and/or industry elements that could affect the success of your company?
When it comes to equity financing in the early stage investors won’t seek collateral or anticipate anything in the short future. While there’s an identical examination of the personality of the business’s proprietor, however, the focus is on that person’s capacity to provide the future-oriented vision of the company.
Equity investors would like to find out whether you have a past experience of success in starting an enterprise? Do you have something in your business plan that suggests the business will be successful in the near future? Investors will be looking at the long-term perspective and will be evaluating the company and its long-term outlook instead of cash flow or collateral in the near term.
4. What are you willing to finance your loan?
In the case of debt financing, if you’ve borrowed money and it’s between 30 and 45 days you’ll have to pay it back regardless of whether or not you’ve already made your first sale. If you’ve selected a revolving line of credit it will also have to be paid back promptly. The most important thing to think about prior to choosing credit financing is the ability to pay back the lenders. In the event of defaulting on a loan, it will significantly affect your credit and the chances of securing funding at some point in the near future. The good thing is that when you decide to go with the option of financing with debt and you take credit, then you’re in a position to calculate how much the cost will be.
In equity financing, there is no payment throughout the process. Instead, the repayment process is determined by the possibility of an exit strategy in the future. This could include a transfer to a different company, refinancing, or a future round of equity financing, which gives investors their money back plus the possibility of a profit. That’s right there is no cash flow you have to pay in the beginning. In reality, you’re making a concession to a certain percentage of the value of your business’s future in the eyes of investors when choosing for equity financing, and it is important to know the implications of equity payments. If you decide to give up 10% of your company, contingent on your business’s performance and/or failure may result in much or even a small amount. If your company fails, the debt is discharged and you are not liable for any debt and have no obligation.
Equity and debt financing both come with advantages and disadvantages. Consider them both carefully prior to deciding on the best method of accessing the capital needed for your company.