A Quick Guide to Business Financing
New businesses are the ones that are truly making dents in the marketplace right now. Over the pandemic, many people decided to throw caution to the wind and start their dream businesses as many larger companies sank under their own weight and had to either restructure or fall into insolvency.
But one of the most crucial and difficult aspects of any new business is sorting out the capital to make it scalable and competitive. Financing your business can be tough in an environment where many investors are holding their cards close to their chest but there are two proven ways to get your big idea off the ground.
Anyone with a mortgage should be able to understand the fundamentals behind debt financing. The idea is that, after a credit check, a bank or private investor offers you a loan with repayment terms that include interest.
The advantages of debt financing are that the lender has no say over how you run your business. They are not even a silent partner; they are just a lender, and that relationship ends the moment you pay back the loan. All interest paid is tax deductible too and your monthly repayments can be easily folded into your forecasting models.
The downside of debt financing, meanwhile, is that you will need to make more money every month to meet your repayments, and this can be difficult for small struggling businesses. This kind of lending can also slow during times of economic uncertainty and if the interest rates rise, you will have to repay more on your loan.
Equity financing is what happens when an investor buys a stake in your company. If you’ve ever seen Dragon’s Den then you know what to expect. They invest a certain amount in return for a percentage of equity in your company in return. These investors are generally venture capitalists who seek to use their influence and knowledge to grow your company for their benefit and yours.
The benefit here is that you don’t actually have to pay back the investment. There’s less risk here because, if your business enters into insolvency, you don’t actually lose anything. The risk is all down to the investors. This means more liquid cash on your hands to spend on your business. Investors will also lend a helping hand, unless they are angel investors only interested in fast and simple returns.
The major disadvantage, however, is that you’re not just taking on an investor but a partner. You are also giving away a percentage of your company, so if your company grows to be worth many more times the initial investment amount, you’re losing out on a lot in the long run. You will also have to run all decisions by your investor and if they own more than 50%, they hold the reigns completely!
Of course, crowdfunding is always an option too. However, while this might work well for individual projects, it’s often overly complicated and runs the risk of too many cooks spoiling the broth.