Many small business owners are consistently faced with questions about how they will finance their small business operations as they establish themselves and continue to grow. Should they borrow money from investors or take out loans? These are complex decisions that oftentimes require the business owner to take many things into consideration when choosing which loan they will use and what partners they are comfortable working alongside.
What is Equity Financing?
If you are able to gather equity money from different financers, you will be able to help finance and grow your business without the pressure of payment deadlines from lenders.
Advantages of Equity:
Less Risk: If you get equity financing, there will be less risk involved as you don’t have the pressure of making monthly payments on the loans. It’s even easier when you are a startup business and may not have the capital to make monthly payments on a consistent basis.
Credit Problems: If you are someone who has credit problems, you can use equity financing to help fund and fuel your business’s growth. Many businesses with credit problems will find the rates for the loans that they can afford too high to make them a reasonable option for their business.
Cash Flow: Equity financing can help increase your business without taking additional funds out of your business. It can help your company grow its cash flow instead of restricting it by having to make more monthly payments.
Long-Term Planning: Equity investors give you more time to turn the money they provide into assets as they do not expect a return on their money right away.
Disadvantages of Equity:
There are also some downsides to equity, including the following:
Cost: Equity investors expect a return on their financing and the company and owner must be willing to share their profits with investors when their cash inflow begins to increase.
Loss of Control: As an owner, you have given up some control of your money as more investors come into the company. The partners you take on have a voice in business decisions as well.
Potential for Conflict: The more equity partners you have in your business the more chances there are you want to disagree about how to do business and how to spend the money that is invested into the company.
Just like any other form of getting capital, there are ups and downs to equity financing. Equity financing may work for some companies and not others. There are different types of financing that are right for each business.
If you have any questions on whether equity financing will work for your company, please feel free to contact us for more information. We are here to help.