Finance is as ancient as life on earth. Today the finance branch of economics is not merely a word. It is an important academic discipline of greater importance due to its implications in businesses whole around the globe. Business finance is the organization of assets, which is the most crucial task for any company. Business financing covers global finance, budget analysis, financial forecasting, and portfolio management. Business finance has two types of debt finance and equity finance. Both type of financing carry their pros and cons. Entrepreneurs need to discover which is best for them. Let us have a look at the pros and cons of debt and equity financing.
Debt financing
Debt financing means borrowing money from some source and promise them to return it. You have to repay it in monthly installments. If you have some type of business it is obvious that you some point of time in your life need for some additional cash to hire help or buy a piece of equipment. So in many cases debt financing is only the solution. With the help of SR&ED Financing, you can get cash to invest in R&D activities. Although debt has some negative connotation. There are many types of debt financing available for small business owners. Let us have a look at the pros of debt financing.
Pros of debt financing
1- Control and ownership of your business:
One of the biggest advantages of debt financing is the money that you are borrowing is all yours. You can keep all the profits of your company and no one will take the profit of your company.
2- Tax deductions:
Business debt creates more tax deduction, but it does not affect the seed stage. As your business grows it creates huge profits.
3- No greater interest rate:
After paying back the debts you do not have to pay more interest. Using debt financing is far cheaper.
Cons of debt financing
1- Repaying the debt:
The biggest disadvantage of debt financing is that you have to repay the debt no matter what and how his business is going. If your sales are down still you have to pay it back.
2- More interest rates:
As interest rates vary with time, it also changes the repayment terms. You have to pay higher interest rates that cut into your profit.
3- Effects credit rating:
Borrowing a large amount of money affects your credit rating which also results in higher interest rates.
Equity financing
In this type of financing, you do not have to pay the money back. You do not have to pay this money to investors eventually. You only have to pay this money to investors when you start getting profit from your business. Let us start with the pros of equity financing.
Pros of equity financing
1- No interest payments:
The biggest pros of equity financing are that you do not have to pay interest. You have to give some portion of the profit that you gain in your business to the investor.
2- Do not have to pay monthly:
Inequity financing you do not have to pay monthly to the investors until you make a profit. It helps to keep more cash in your pocket.
3- No liability:
If you do not get profit from your business, the perk is you and your family do not have to suffer because all the suffering is for the investor.
Cons of equity financing
The cons of equity financing are given below.
1- Give up ownership:
One of the biggest disadvantages of equity financing is that you have to give up ownership to the investor. The investor owns the portion of your business. They will interfere in your business. They will tell you how to spend the money which they have invested in your business.
2- Splitting of profit:
As you have reduced ownership in equity financing, which means you have to split the profit.
Conclusion:
In a nutshell, both of the types of business financing they have its pros and cons. You have to be smart enough to understand that at this point in your business which type of financing suits more. Always make sure that a good legal counsel represents you. You can help secure your future by doing a right choice for your business.