Whether you’re planning to launch a new venture or want to expand your business, you are going to need money. Debt and collateral financing are two different economic strategies you can opt for. Incurring debt entails borrowing money for your business, whereas gaining equity means injecting your own or other stakeholders’ cash into your company.
Quite a few business owners are reluctant about borrowing from a financial institution, as it means cut in cash profits. But it might be a good option so long as you have sufficient income to pay back the loans, plus interest.
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Small business owners frequently opt for equity financing because they are not sure about qualifying for a loan, or even they don’t want to part with cash profits to service the repayment. Investors and partners can provide equity funding.
Advantages of debt financing:
o You do not have to part with any ownership or even future profits of your business. Your lender has no control in how you run your business.
o You can keep the business profits in the company, and enhance the long term value, or make use of those profits to pay a return towards the owners of the company.
o You can avail tax deduction on attention paid.
Disadvantages of debt financing:
o You have to maintain sufficient income to repay the loans.
o You will end up using your cash profits to pay back the loans. You may earn income but there won’t be cash to demonstrate for it.
o The riskier the particular loan is, the higher the interest rate will be.
o You might have to provide some sort of guarantee as owner of the business.
o Lender has rights to seize your collateral, in the event of non repayment.
o Too much financial debt might affect your credit rating and your ability to raise money in the future.
Advantages of collateral financing:
o Equity contributions do not need to be paid back even if your company goes bankrupt.
o Your business assets do not have to be pledged as collateral to acquire equity investments.
o Businesses along with sufficient equity will look better to loan companies, investors and the IRS.
o Your business will have more cash available since it will not have to make debt payments.
Drawbacks of equity financing:
o You will have to part with some of the ownership stake, and your business’s profits will be shared by other equity investors.
o You may have to contend with different ideas approach run the business.
o No tax deduction on dividend payments.
Most businesses have a mix of debt plus equity financing. Too little equity can prevent you from securing or repaying loan products, while carrying little or no debt can indicate that you are too risk-averse, which your business might not grow as a result.
Company Cash Advance, a Good Alternative:
But can there be any alternative to loans so far as the small businesses are concerned? Yes, there are many others that are offering business cash advance in order to small business owners.
Business cash advance is not a loan and the organization offering this money advance gets their money from the bank card sales that the business does in a specific period, there by decreasing the burden of paying back the mortgage and the terms and conditions to qualify for like cash advance are also relatively simple.
There are numerous organizations which provide such payday loans. Organizations like MerchantCashDirect usually provides cash advance for working capital requirements. They more often than not, target specific industrial sectors. To expand the example of previously discussed organization: They seek to provide funds to people into restaurant, retail or service industry processing at least $4000 in credit card receipts per month.
I hope that I helped clear some uncertainties and given some useful information through my articles. If information is power, you are now strengthened to succeed in your endeavor to secure loan, there by realize your dreams.