What Is The Difference Between Debt And Equity Financing?

When launching a small business or other new venture, the cost of doing so can be a big concern. Fortunately, there are as many ways to finance a start-up, as there are to skin a cat. Two popular ways are debt financing and equity financing.

Debt Financing

Most business people are familiar with debt financing, as it is the most common of the two. Carrying debt simply means that you are borrowing the money. Using a credit card, obtaining a mortgage, and taking out a small business loan are good examples of financing using debt.

There are several benefits to debt financing. Loans can be had from many banks, credit unions, and other financial agents. Furthermore, once you pay the loan back, your liability is over. Additionally, having business debt can create tax benefits, which will increase the business’s bottom line.

The major downside of debt financing is that it must be paid back, whether your business s is doing well or not. Keep in mind that some loans have variable terms that can change with time and require back-end increases in payback.

Equity Financing

This type of financing is perhaps less well known than taking out a loan. With equity financing, you receive up-front working capital in exchange for ownership rights in your venture.

One of the main benefits of equity financing is that you’ll take on partners who have a vested interest in seeing you succeed. Additionally, no fixed payments are due, just a percentage of the venture’s ongoing profits.

Equity financing means that you will give up some control over certain aspects of the business. It may take a bit of negotiation and a lengthy application and underwriting process.