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co-founder/partner of range.
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As a small business owner, you should never borrow more money than you need. Debt can constantly drain a company’s cash flow, and unless it can retain the principal or generate the necessary profits, it can face problems when the debt comes due. As a co-founder of a lending business that has to sell a portion of the business to an investor in order to raise capital, there are many ways in which debt is preferable to financing. Here’s how debt can help your business more than equity finance.
you keep control
The main advantage that debt offers over equity is that you don’t have to hand over part of your actual business to another person. Even selling his 10% or so of the business would give up control of the company entirely, and probably irreversibly. This can steer the business away from its original vision and, at worst, hinder business growth. Equity financing doesn’t drain cash flow, but it does provide an injection of cash, but the downside risk is unacceptable for many companies.
it can be a short-term obligation
Debt financing typically only runs for a few days, while equity financing is perpetual. An investor’s ownership of a part of your company never goes away unless you buy them at some point. This can be a large lifetime price to pay for a one-time cash injection. Before choosing an equity route, discuss with your tax and financial advisors to make sure the exchange is really in your company’s best interest.
Debt can generate income
When you borrow money, you can use that loan by hiring additional workers, expanding your facility, or increasing your inventory. Proceeds from these activities can be used both to pay down debt and to generate sustainable profits for the company. However, if you have an equity partner, you will have to share some of that profit with your partner. Plus, equity financing is her one-time injection, so if she needs additional funding in the future, she’ll have to go back to the capital markets again. If you continue to sell your company’s shares to generate funds, you will need to share even more of the profits with your investors.
Can create financial history
You can’t build a business’s credit history by injecting investment capital. However, a business loan that you pay back in a timely manner can significantly boost your score. Your credit rating can continue to build with every loan, with the added benefit of saving you literally thousands of dollars over time.
Loans can be refinanced
Even if you have to take out a loan in a high interest rate environment, you may be able to refinance that loan at a higher interest rate in the future. In other words, if interest rates rise, you can take advantage of the current low interest rates, but if interest rates fall, you can swap out to take advantage of lower funding costs. Depending on the size and interest rate environment, you could potentially save thousands of dollars annually in financing costs, which you can deploy into additional staffing, products, or general corporate needs. Alternatively, if you sell part of the company in the form of equity financing, you will not be able to recoup what you have lost or benefit from the changing economic environment.
Things to know before renting
Before a company incurs debt, there are a few things that must be understood.
• What is the total cost of the debt?
• Will this affect your credit?
• How long will it take to pay off my debt?
• Are there penalties for repaying or refinancing debt?
• How much money do you really need to borrow?
All of these questions mostly concern the math of getting into debt. You may think that you need to borrow $20,000 to buy new equipment, but are you sure you have the ongoing cash flow to pay off that debt and for maintenance, service, even marketing, etc.? need to understand if additional funding is required. You should also research the consequences of not being able to pay. Especially when it comes to personal liability.
Debt is nothing to be afraid of, but it should be managed. Debt provides funds that can be used for expansion and growth, but it also creates additional debt that must be met, even in bad economic times. When business is booming, expanding the debt base may seem like the easy and obvious choice, but things could change if the economy tumbles into recession. Declining sales can strain cash flow and make it harder to pay off debt.
To avoid these problems, have a plan of action before you get into debt. You should be able to answer all the questions above and consider consulting a personal loan expert if needed. Borrow only what you need, keep your cash on hand, and have an exit strategy in case the economy gets tough.
Conclusion
Debt and equity financing are two common ways companies raise capital, and both have their pros and cons. Equity financing, for example, does not drain a company’s cash flow. It dilutes existing owners but requires no interest payments or repayment of principal. This not only frees up capital for reinvestment in the business, but also puts money into the company’s coffers.
However, if you want to take advantage of financing, have full control of your company, and have flexibility for the future, it may make more sense to borrow money than to sell part of your company. It often happens. Consulting a personal loan expert can also be helpful if you are looking for a customized lending solution that best suits your company’s needs.
The information provided here is not investment, tax, or financial advice. Please consult a qualified professional for advice regarding your specific situation.
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