For getting the best business financing deals you must understand the difference between debt financing and equity financing
Researching your many options for best business financing deals can be time consuming. If you’re looking to start a business or take the next step and expand, you have the option of debt or equity finance.
Here are some key things to consider when deciding if debt or equity finance best suits you.
How much do you need to borrow?
The first thing you need to know for best business financing deals is how much money you’ll need.
You can get an idea of this through a number of different methods:
- If you’re starting a business – add up your set-up costs such as rent, equipment, shop fit-out, inventory, wages and super contributions (including your own), legal and accounting costs.
- If you’re purchasing an asset – ask for a copy of the contract with the purchase price.
- If you’re borrowing for cash flow purposes – use cash flow forecasts to identify any shortfalls.
By comparing this amount to the cash you have available, you can gauge how much money you may need to borrow. Knowing how much money you need is the first step to securing best business financing deals. To reduce financial stress, if it looks like you need to borrow a larger amount, you may want to consider ideas that can save you more money or, if you can, keep working your existing job for extra income.
Debt finance is borrowed money that you pay back with interest within an agreed time. The most common types include:
- Bank loans
- Credit cards
- Equipment leasing and hire purchase.
Advantages of debt finance
- You have control over your business and assets as you don’t need to answer to investors
- You don’t have to share your business profit
- Some interest fees and charges on a business loan may be tax deductible – your accountant can advise you on this.
Considerations for debt finance
- New businesses may find it difficult to secure debt finance without accurate financial records or projections and a comprehensive business plan
- You’ll need to generate enough cash to service repayments, fees and interest
- Regular repayments can affect your cash flow. Start-up businesses often experience cash-flow shortages that may make regular payments difficult
- If you use an item as security to guarantee a loan, the item could be repossessed should you be unable to make repayments.
Equity finance is investing either your own or someone else’s money in your business. The key difference between debt finance and equity finance is that the investor becomes a part owner of your business and shares any profit the business makes.
The main sources of equity capital are:
- Family and friends
- Business angels – individuals who invest their own funds (typically up to $2 million) into start-up businesses
- Crowd funding – this relies on people to donate money to a business
- Venture capitalists – professional investors who invest funds (generally $2-10 million) in operating companies
- Public float – raising money by issuing securities (e.g. shares) to the public.
Advantages of equity finance
- Equity loans may be the best business financing instrument as it provides freedom from debt, with zero repayments.
Considerations for equity finance
- Shared ownership means you may have to give up some control of your business. Investors not only share profits, they may also have a say in how the business is run
- Accepting investment funds from family or friends can affect personal relationships
- You may have to compete with a number of other business for funding from the same source, making it harder to get the cash you need.
Whether your business is just starting up or preparing for expansion, best business financing deals can help support your short and long term financial goals. You will find there are a number of benefits to having business credit, but before you apply, it’s important to determine whether your business is ready for credit.
Finding the money to fund your new company (or an existing company) can be an interesting experience. A good business plan can help you determine how much money you need to get started. Truthfully, most new businesses are started with the owner’s own cash, credit cards, friends and family, without any type of plan whatsoever.
There are many loans in the market for small business owners and not all products may be the best fit for your business. What’s worse is, taking an unsuitable loan could be a huge setback to you personally, as well as to your business. So, an important factor is, work with your lender to determine the type of loan that fits your needs.
Before getting SME start-up loans though, you need to talk to loan consultants. They can set you up on a path that can get you a it in a quick and seamless manner. Loan consultants have close links with the best lenders in town and can help you compare various loans and settle for a package that best suits your needs. You should also get yourself up to speed by reading up on some money saving tips.