Christian Debt Recovery

Equity Vs Debt Financing

September 28th, 2010 |

Author: Gavin

What Are The Best Ways To Raise Capital?

Raising capital is not an easy step of starting a business but it is necessary. One major reason why businesses fail is because the owner lacked necessary funds. Money is needed for equipment, property and more essentials for your business. You may wonder how you can raise the money needed to start your business.

There are two major sources of funding you can seek for your business: Equity VS Debt Financing.

You may have some cash you want to put into the business yourself, so that will be your initial base. Maybe you also have family or friends who are interested in your business idea and they would like to invest in your business. If you decide to accept investments from family and friends, you will be using a form of financing called equity financing.

Advantages of Equity Financing:
• You can use your cash and that of your investors when you start up your business for all the start-up costs, instead of making large loan payments to banks or other organizations or individuals.
• If you have prepared a prospectus for your investors, who are a bit reliably people and explained to them that their money is at risk in your brand new start-up business, they will understand and offer valuable business assistance.

Disadvantages of Equity Financing:
• Understand that Investors do expect a share of the profits
• Since your investors own a piece of your business, you are expected to act in their best interests as well as your own, or you could open yourself up to a lawsuit.

If you decide that you do not want to take on investors and want total control of the business yourself, you may then want to pursue debt financing in order to start up your business. You will probably try to tap personal loans, home equity, business loans, and even credit cards.

Advantages of Debt Financing
• Debt financing allows you to have control of your own destiny regarding your business with no investors to be paid back.
• If you finance your business using debt, the interest you repay on your loan is tax-deductible.

Disadvantages of Debt Financing
• If you don’t make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible.
• Calculate the debt to equity ratio to determine how much debt your firm is in compared to its equity.

Which is best; debt or equity financing? It depends on you.

About the Author

Stamford Privee – Your Independent Asian Family Office. The experts assist you in managing and investing your private funds and in Wealth Transfer and Trust Structures. Log onto www.stamford-privee.com for more details

DEBT VS. EQUITY FINANCING: An entry from Thomson Gale’s Encyclopedia of Management

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SmallBiz, Business Week magazine, December 2009/ January 2010 issue. Equity vs. Debt. Financing Your Business When The Banks Still Won’t Play Ball.

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