DEBT FINANCING VS. EQUITY FINANCING
Choosing what’s right for the start or growth of your business
Understand the difference between debt and equity to find financing that works for you.
Debt Financing vs. Equity Financing
Debt financing refers to taking out a conventional loan through a traditional lender like a bank. Equity financing involves securing capital in exchange for a percentage of ownership in the business. Finding what’s right for you will depend on your individual situation.
The benefits of debt financing are that you can get money quickly, you know exactly how much your financing is going to cost and you can retain full ownership of your business. The downside is that you need to pay back the money you borrowed plus interest, which could put a strain on your cash flow.
Equity financing provides an option that doesn’t require any debt payment. Instead of repaying what you borrowed, you’ll forgo a percentage of future earnings. But giving up part of a business that may become very profitable could be an expensive long-term decision.
M&T’s Business Banking Specialists can help you find the financing option that best serves your situation.
Can you qualify for a loan?
Debt financing qualifications depend on your financial situation, including your credit history and cash flow. Some new business owners opt for equity financing because they don’t have the capacity to repay a loan.
How fast do you need money?
With equity financing, there might be a period of negotiation to determine what percentage of the business is worth the amount of money being invested. Debt financing often moves much quicker. Once you’re approved for a loan, you may be able to get your money faster than with equity financing.
Will you give up part of your business?
Giving up a percentage of ownership is the biggest drawback to equity financing for many business owners. Debt financing doesn’t require using business equity as collateral. Also, depending on the terms of an equity financing deal, an investor may have a voice in decision making at the company. Differences in opinions and personalities could compromise the original owner’s vision for the business. On the other hand, an investor may have knowledge or experience that could help a business succeed.