When small-business owners need extra capital to grow and scale their company, it can be a challenge to figure out which type of financing is the best fit. Should you take out a business loan or look for an investor? Before making this important decision, it’s important to consider the key differences between debt and equity financing.
In simple terms, debt financing – or a “term loan” – involves borrowing money from a lender under the expectation that it will be paid back within a certain timeframe, plus interest, with the principal fully amortizing over that term. If you’ve ever taken out a loan from a bank, you have financed something with debt. Unlike equity financing, it doesn’t require you to give up a portion of your company to an investor. However, if you acquire too much debt, it can stifle the growth of your small business.
On the other hand, equity financing involves trading a portion of your business’s ownership to an individual, angel investor, venture capitalist or private equity firm in exchange for their capital. Although this finance option avoids the hassle of repayment or interest, there are strings attached – for instance, profits must be shared with the investor. It also requires devoting a significant amount of time and energy into finding and pitching the right investor for your business, industry and stage of growth.
Generally speaking, business owners often opt for a mix of both debt and equity financing to access capital for their company. The right ratio will depend heavily on your type of business, cash flow, profits and the amount of capital needed to grow and scale your business. However, it’s important to remember that, before business owners can drive growth and success to their company, they first need to focus on improving their cash flow cycle by getting their financial house in order.
Contact Evolution Capital Partners at (216) 593-0402 or by using our online contact form.
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