There’s a strong emphasis on business investment at present, with companies increasingly concerned about their coffers against the backdrop of Brexit.
Whilst the government has moved to assuage these concerns by injecting an estimated £200 million into a state-run scheme designed to help finance businesses, however, some firms are continuing to weigh up their available options in terms of selling equity in their venture or applying for a commercial loan.
We’ll compare these two options below, whilst asking which one is right for your business and circumstances.
Selling Equity vs. Loans – A Brief Comparison
Equity financing is a relatively simple concept, and one that requires you to seek investment in your business in exchange for shares that deliver a viable return over a sustained period of time.
In contrast, debt financing requires entrepreneurs to borrow capital from banks, credit union and financial companies, with this loan usually subject to variable interest rates and often secured against the value that exists in your business.
The benefits of debt financing are obvious, as this method enables you to retain all of the equity in your venture and therefore any potential profits. Loans are often quicker to secure too, but these advantages must be caveated by the fact that you could lose your business if capital is secured against it and the venture ultimately fails.
It can also be harder to qualify for a loan, whereas it’s easier to sell equity to interested parties as this delivers a far greater value proposition to benefactors. So, whilst you may have to sacrifice equity in your venture in order to secure funds, it’s possible to connect with high quality investors that can help to influence your business in several different ways.
It’s also possible to sell equity in your business and retain control of the organisation, especially as you may not be fully accountable to investors depending on the terms of the agreement and the benefactors that you use.
Which Option is Best for you?
Ultimately, you’ll need to make a financing decision that suits your precise circumstances and long-term objectives, whilst this is a deeply personal choice for which both options offer genuine pros and cons.
As a general rule, however, entrepreneurs with relatively low-value startups should consider a form of debt financing as their first port of call, or run the considerable risk of disenfranchising themselves and selling too much equity in their ventures.
Conversely, equity financing can be extremely beneficial for technology-based or high value companies, as this allows a far greater opportunity to sell equity whilst also retaining a controlling and valuable stake.