Merchant Advance Blog

Blog Article: Small Business Financing: Debt or Equity?

There are a multitude of small business financing options, but most of them break down into two categories: financing by debt or equity.

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In debt financing, businesses take out loans to fund their development, with the main cost being associated with the interest accrued on those loans.  The advantages of debt financing are mainly that:

  • Business owners retain full control over their operations
  • A lender is entitled only to repayment of the agreed-upon principal of the loan, plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company.
  • Modern financial solutions are allowing small businesses to finance their growth using debt without compromising access to cash flow resources.

Equity financing, on the other hand, is predicated on the sale of interest in your company’s ownership. Many startups and smaller companies with a longer projection for cash flow stability have relied on equity financing models, including “angel investors,” to raise capital. This funding avenue can be very valuable for early-stage businesses, especially those in the technology sector. Investors can even be friends, family or other close business acquaintances you may have made over time. Equity financing also gives you the opportunity to bring qualified and forward-thinking partners on board with your business: when thinking about who to partner with, consider their cultural and ideological fit with your business, and remain focused on retaining the “heart” of what you wish to build.

The world of e-commerce has opened up many other options for financing new businesses. One example is crowdfunding, where people can pitch their ideas to the general public through designated platforms and ask for donations to reach their capital goals.

The majority of brick-and-mortar small businesses pursue debt financing – it’s being made more accessible through the efforts of financial technology firms such as Merchant Advance. It is becoming increasingly more fair for business owners to get the cash flow structure they need without being locked into long-term fixed interest as in a traditional bank loan (when accessible given the risk profile adopted by major banks) or giving over ownership of their business as in an equity financing agreement.

 

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