Equity Financing or Debt – Which Option is the Best for Your Young Business?
Fledgling businesses are often run on low reserves and there are usually two options that are open to them when it comes to financing: either going into debt or selling some of their equity. This can be a tough decision for many. Some may be afraid to lose control, while others might be asking themselves which of the two options would give them the most value. This is why you’ll need to look at different factors before you make your decision and choose wisely. Here are some of the things you will need to consider first.
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What are Your Goals for the Long Term?
One of the first things you have to take into consideration is your vision for the future of the company. Specifically, how involved do you want to be in 5, 10, or 20 years? If you have a clear exit strategy, it might be advantageous for you to get venture capital. You’ll get a partner that will be ready to take over the reins at a later time and allow you to play the background while keeping some ownership and decisional power.
Look at Interest Rates
The opportunity cost of going for equity instead of debt will largely depend on the current cost of borrowing money. Maybe your business has access to specialty loans like some of those offered by the SBA, or other low-interest loans. In this case, it would be wise to look at how much the loan will cost in its entirety and if it would allow you to accomplish your objectives without giving up equity.
Another thing you could check is if you could adjust your habits to improve your credit score. Having a better credit score will allow you to access a wider number of options at lower rates.
How Much Control Do You Need?
When you’re giving up equity, you’re giving up some of your power. The question is how much you’re willing to give and for how much. Keeping 51% of the company is what many owners do to make sure that they have the most decisional power. However, there are some cases when investors will demand to have control. It is up to you at that point to see if their expertise could benefit the business as a whole and bring in more revenue. This would also require less effort on your part.
What’s Your Current Structure?
Your current business structure should also be considered. For instance, if your business is currently a partnership, selling equity might be more complicated. If you decide to sell equity on the open market through stocks, you’ll need to register as a corporation. All of this comes with additional costs and hurdles that you may not be willing or able to deal with at the moment.
Conclusion
As you can see, both options have their pros and cons and it ultimately depends on your business and where you want to take it. Make sure that you think twice before going for any option, and also know that you can opt for mixed financing if you want to get some of the benefits of both.
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