If you are a business owner, you will be faced with the predicament of raising money to expand your business or sustain your business operations. When that situation comes, you usually have to choose between one of two options - debt financing or equity capital. There are pluses and minuses to each.
Debt Financing
This is when you seek funds from a third party financial institution that will be willing to take a risk of investing in your business. It is no surprise that banks are very careful about granting loans to business owners in today's environment. The whole subprime crisis was caused by irresponsible lending and most banks have really cleaned up their act since the recession has hit. So, if you are planning on obtaining a loan for your business, you will need a very good personal credit history to go along with your business credit history.
Banks are also interested in a lot more than just credit scores these days. They will want to take a look at your business plan that should ideally include financial statements of the past as well as projected financial statements. They will also evaluate your business acumen and your personal reputation to make sure that they lending to the right person. Some banks will also require that you get a guaranty from the SBA.
The SBA is a federal organization that was created in 1953 to help small businesses acquire business loans. They will provide a guaranty that they will reimburse a loan if the business owner is not able to pay back a loan.
Debt financing is very affordable as you will only pay interest on the amount you have borrowed. You will not have to share the profits in a business which is not the case with equity financing that is discussed below.
Equity financing
Equity financing is when you invite investors to invest in your business in return for a future share of the profits. While it might be easier to obtain, equity financing can provide a lot of headaches as investors will usually want to dictate the operations of the business or interfere with your business plans according to their will.
Equity financing can still work for business owners who find good investors who will not interfere with the operations of the business. They will however have to pay a high cost by sharing their profits according to agreed levels that would have been discussed at the time the equity investments were made.
Source:www.ezinearticles.com
Debt Financing
This is when you seek funds from a third party financial institution that will be willing to take a risk of investing in your business. It is no surprise that banks are very careful about granting loans to business owners in today's environment. The whole subprime crisis was caused by irresponsible lending and most banks have really cleaned up their act since the recession has hit. So, if you are planning on obtaining a loan for your business, you will need a very good personal credit history to go along with your business credit history.
Banks are also interested in a lot more than just credit scores these days. They will want to take a look at your business plan that should ideally include financial statements of the past as well as projected financial statements. They will also evaluate your business acumen and your personal reputation to make sure that they lending to the right person. Some banks will also require that you get a guaranty from the SBA.
The SBA is a federal organization that was created in 1953 to help small businesses acquire business loans. They will provide a guaranty that they will reimburse a loan if the business owner is not able to pay back a loan.
Debt financing is very affordable as you will only pay interest on the amount you have borrowed. You will not have to share the profits in a business which is not the case with equity financing that is discussed below.
Equity financing
Equity financing is when you invite investors to invest in your business in return for a future share of the profits. While it might be easier to obtain, equity financing can provide a lot of headaches as investors will usually want to dictate the operations of the business or interfere with your business plans according to their will.
Equity financing can still work for business owners who find good investors who will not interfere with the operations of the business. They will however have to pay a high cost by sharing their profits according to agreed levels that would have been discussed at the time the equity investments were made.
Source:www.ezinearticles.com
