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Debt Financing Equity Financing

Only a few can start businesses with their own money. Others have to somehow find the money. These people have to research to raise the capital. Before starting to find money, the want to be business owner should prepare a business plan to know how much is needed as well as to convince lenders that the business would be a success.

Many people, who start businesses, have some money. On this financial base, they add capital from others. Sometimes friends and relatives would like to invest. This seems an easy way to find money. Nevertheless, even to accept this money, they have to consider many factors. After all these considerations, if they accepted these investments they are called equity financing.

There are advantages and disadvantages of equity financing. The advantages are they don't have to borrow money from banks, or lenders. They are almost free from debts. Further, they can explain to the investors that generally every business is at risk. In this way, investors would understand that if the business failed, they would not get their investment back. Another advantage of equity financing is there will be experts in business matters among these investors. They can help develop the business.

The disadvantages are, sometimes equity investors may be a nuisance. They may want to know the progress and some may even want to control the business. New business people have to keep in mind that these investors have shares in the business. Some day they would ask for the money back and may even file a lawsuit to get it. If these people are very close friends or relatives, the relationship of the business people may be at a risk of getting sour. At that point new business people might think that getting loans from banks or lenders are better than depending on the money from their own people.

On the other hand, if someone chooses debt financing, h/she has full control. Debt financing includes personal loans; home equity loans, money from credit cards, business loan etc. With debt financing, persons can control their businesses and make a decision without having to account to anyone else. They are the owners of all the profit. In addition, debt financing is tax deductible and the interest for loans is based on prime interest rate. Some small business administration loans have many ideal terms that greatly help to develop a business.

On the other hand, when debt financing, people have to pay the installments in time, or their credit points will go down. That will reduce the future bargaining power with lenders and banks. Many commercial banks require security to grant loans. If they are unable to pay back the loans, they may lose their properties or other collateral. Further, with debt financing, people have greater risk of bankruptcies. With all this reasoning, it is only you who can select the best to start a business.

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