Business financing requires big decision and should be treated differently than how you approach personal finance. Understanding the difference between being in debt and equity finance creates a big difference in successfully managing a business.
If you are a business owner looking into funding your business and taking the next step to expand your network or grow your business, you can either borrow or go for equity financing. Although there are many available types of funding you can avail for your business, the time to research and understand these options might consume more time than necessary. Thus, consulting with a business loan specialist would be ideal. Whether you are an existing business or a new one, deciding on the appropriate business finance for your company is essential.
Is Debt or Equity Finance Suited for Your Business?
Which type of finance is best for your business? Determining how much you need to borrow is the first step in successfully choosing the right type of loan for your business. The financial needs of a start-up business are different from an existing one. Here are some key points to consider when computing for how much money your business requires.
A Starting Business would require financing for set-up costs which includes rent, equipment, inventory, wages, super contributions, legal, shop fit-out, and accounting costs.
Financing for Asset Procurement may require a copy of the contract together with the purchase price and the other fees included in the sale of the asset.
For Cash Flow Purposes, you can use a cash flow forecast to be able to determine any shortfalls. A cash flow template from a finance loan specialist can help you determine this.
Compare these amounts to the current cash you have available. You can use this to determine the amount of money that you may need to borrow. To be able to lift the financial stress on your end, you may want to borrow a larger amount or consider money saving ideas inclusive in the business loan available for you.
Explaining Debt Finance
Debt financing is borrowed money that you need to pay back, together with the interest within an agreed period of time or within the loan term. The most common type of debt finance includes:
- Bank loans
- Overdrafts
- Mortgages
- Credit cards
- Equipment leasing and purchase hires
- Debt Finance Advantages
You do not need to answer or report to investors if you choose to borrow money from financial institutions, unlike in getting Angel Investors for your business. Full control over your business is one of the advantages you’ll enjoy when you borrow financing for your business.
Keep your business profit to yourself and your business. Since you do not have to answer to any investor on your business, you’ll be able to get the whole of your business profit. Interest fees and charges on your business loan are also tax deductible. Your accountant can help and advice you on how you can make the most out of this privilege.
Things to Consider for Debt Finance
A small business loan requires the same amount of documentation compared to a higher loan. Accurate financial records are required to secure your debt finance. If you are a start-up business, you need to provide a comprehensive business plan and projections to your bank or lender. However, you need to generate enough cash, from your business to be able to cover service repayments, fees, interest rate, and other surcharge charges.
Keep in mind that monthly payments on dues will be affected with regular payments. Your cash flow will be affected and would be quite difficult to sustain in the first few months especially for new businesses. Prepare a back-up plan for this. In the event you used a security ass guarantee for your business loan, this property could be repossessed should you fail to afford repaying your loan. Whatever your finance options may be, keep the above tips in mind.
Equity Financing on Your Business
Finding investors who are willing to put money into your business is the basic definition of what equity finance is. What makes it different from debt finance is that the investor becomes part owner of your business. They are included in the decisions that will be made for the business and will receive shares from any profit the business will make.
5 Main Sources for Equity Capital
1. Family and friends – This business finance option is the one you have easy access to. You can ask for friends and families who are interested in investing money on your business. Doing so gives them rights on deciding for the business and will earn a share on the profit the business will generate.
2. Angel investors – Business angels are investors who put their money into start-up businesses. They usually invest up to $2 million on a single business.
3. Crowd-funding – A perfect example of crowd-funding is Kickstarter. Putting money or donating money to a start-up business usually earns a token from the business, or whatever is promised by the company for donating to the business.
4. Venture capitalists – Venture capitalists are professional investors who invest funds in companies that are already starting, Funds starts anywhere from $2-$10 million)
5. Public float– Public float is raising money by issuing securities or shares to the public such as IPOs.
Unlike debt finance, you do not have to worry about repayments. However, you should keep in mind that there is shared ownership in equity financing.
A loan specialist can help you compare and determine which type of business loan is ideal for you. Talk to an Intellichoice loan broker today and get the financial help you need for your business. Apply for the perfect financial product for your business. Call 1300 55 10 45 today.
