Debt vs. Equity Financing: How to Determine Which is Right For Your Business

Debt vs. Equity Financing: How to Determine Which is Right For Your Business

When it comes to securing the best financing, business owners often ponder what type of financing will make the most sense for their business. Debt and equity financing are two types of financing that businesses can use to get the financing they need. However, determining which kind will be best suited for their business is often a question that business owners consider.

Exploring both types of funding often makes it easier for business owners to determine which options would be best for them. Business owners aren’t limited to choosing just one type of financing. Often, the best solutions involve a combination of different forms of financing. 

What is Debt Financing?

Debt financing involves borrowing money directly that creates a debt that must be paid back. This type of financing is often referred to as a loan or similar because you borrow a set amount of money that must be paid back over time and often with interest. Sometimes, debt financing requires business owners to provide collateral for the loan as well. If the collateral is required, it can often be provided in the form of inventory, account receivables, equipment, insurance policies, and real estate. If a business owner defaults on his agreement to make payments the lender can take the collateral to recoup the financial loss. This form of financing allows business owners to benefit through tax-deductible interest payments, clear loan terms, and lender-free involvement in company actions. However, defaulting on your payments can be costly and spell financial ruin for your business. 

What is Equity Financing?

Equity financing involves selling a stake or percentage of your business for financial backing. The people or companies that invest in your business receive a portion of your profits and may even have a say in business choices. Venture capitalists, crowdfunding, and angel investors are often associated with equity financing. The benefits of equity financing include fast scaling, freedom from payments/installments, high-interest rates, and usually no repayment required until the business is profitable, it’s good for start-ups. Your financers become partners who profit alongside you by sharing in a percentage of your profits and the decision-making process, depending on the terms of your financing/loan. Conversely, equity financing can be hard to acquire and you may have to share in the decision-making process. 

Contact Gipson Commercial Solutions for more details about our commercial finance products. One of our financial experts will provide a complimentary analysis of your finances and guide you toward an appropriate product.