Small business owners need funds for expansion and growth. This holds true for businesses in the early phases of their development. Today, there are two main types of funds available to them, and they are debt financing and small business equity financing. Now, as the owner of a small business, which one should you take?
Kavan Choksi- An insight into debt financing
Kavan Choksi is a business and finance expert with sound knowledge of cryptocurrency investments. When it comes to small businesses, as an owner, you can apply for a loan from the bank or get one from family, friends, or other personal loan lenders. In all of these cases, you need to repay the funds back. Even if you get a loan from a family member, they should charge you minimal interest rates under the IRS to avoid gift taxes.
What are the benefits of debt financing?
Debt financing has several advantages; firstly, the lender cannot control business operations. When the loan with all the interest rates is paid back, your relationship with the financier ends. Another advantage of taking debt financing is that you know how much to pay, as the amount never fluctuates. There is only one disadvantage, in case your company does not perform well, you cannot pay back the loan, and your debts will pile up, stunting the growth of the business.
Equity financing and what does it mean for a small business?
The primary difference between debt financing and equity financing is that the latter involves the presence of investors. You can give the shares of your business to family, friends, and other small investors; however, equity financing consists of the participation of angel investors and venture capitalists. Here, you need to present the mission and the vision of your business to the angel investor for availing the funds for your business.
What are the advantages of equity financing for your small business?
The main advantage of taking equity financing for your business is that your investor is taking risks for your company. In case the business fails, you are not liable to pay the funds back, and you will have more business funds available as there are no payments for loans. Investors have the skills to understand the business better as they generally have long-term plans to expand their operations with success.
According to business expert Kavan Choksi, there is only one downside to small business equity financing- you need to give the investor a certain percentage in the control of your business. They will be consulted for every business decision, and you must share your company profits with them. You can remove them only if you have sufficient money to repurchase your business over time.
When it comes to choosing between the two, if your business is a startup serving the local market and does not need a lot of funds, debt financing would be perfect for you. However, if you are a small business aiming for a global reach, small business equity financing and the presence of an angel investor will surely benefit your business successfully!