If you are hoping to start a new business, you will need to figure out where you will get your financing. Without a source of funding at your disposal, it will not matter if your idea for a new business is the greatest in the world. Generally, there are two categories of business financing options: debt and equity financing.
With debt financing, your business borrows from a lender and plans to pay that amount back over time. On the other hand, in equity financing, you are selling partial ownership of your business. Both debt and equity financing have pros and cons for all new business owners. This article will give you some factors to consider when choosing between debt and equity financing options.
Long-Term Objectives
As an entrepreneur, it will be crucial to believe in everything you want to achieve in the long term. What is your intention to start your own business? Where do you want your company to be for ten years? Twenty years? It will be easier for you to decide how financially rooted you will be in your business by answering these questions. Although you don’t need to think about a possible “exit strategy” right now, it’s a good thing to think about.
Also, consider the availability of interest rates. The opportunity cost of choosing equity rather than debt financing is primarily determined by the amount paid for the loan. To ensure that you receive competitive offers from potential lenders, it is a good idea to compare many options before making final decisions. If you improve your company’s current credit rating, this can also make a significant difference.
Need for Control and Finance Requirements
To make sure you can still outperform the remaining shareholders, many small entrepreneurs will hold 51% of the shares and increase the remaining 49%. If it is essential to you that your business is heavy or completely burdened, you should limit the total amount of capital you ultimately distribute. There are many different things that creditors will look at when they decide to grant the financing. These conditions can often be quite strict, which is exactly why your organization should plan its financing plan.
Current Business Structure and Repayment Requirements
The current business structure is another variable that has an impact on the opportunity cost of borrowing. For example, if your company has already been formally designated as a partnership, this can complicate the tradition of equal rights. Besides, if you want to secure the financing of your share capital by general means – such as advertising on the open market – you must formally register your company for a limited liability company.
