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If You Are A Business Owner Who Needs An Influx of Capital
If You Are A Business Owner Who Needs An Influx of Capital
Before deciding which option is right for you and your business, ask yourself
these four important questions:
Equity financing takes more time. Business owners and investors will go back
and forth negotiating the investment package, meaning what percentage
stake will be given in exchange for funding, and a lot of time is spent
discussing the future value of the business. If you’re dealing with more than
one investor, differing opinions on what that value ultimately might be could
make matters more complicated and, thus, take even more time and
negotiation. Additionally, there’s a lot more legal work involved in equity
financing, which, again, makes this the more time-consuming route.
With equity financing, you’ll be sacrificing control over some portion of your
company. Depending on the negotiation, your investors may end up owning
the majority of your venture, meaning eventually you could be voted out of
the business you built.
With debt financing, lenders are looking at your capacity to repay the amount
you borrow plus interest. They’ll examine not just the viability of your business,
but also the financial health of the borrower. How do they do that? Let’s take a
look:
With early-stage equity financing, investors aren’t going to look for collateral
or expect any cash flow in the near term. While there will be a similar review of
the character of the business owner, it’s more about that person’s ability to
deliver the theoretical future of the business.
Equity investors will want to know: Do you have a previous track record of
success starting a business? Is there something about your plan that indicates
this business will succeed at some point in the future? Investors are going to
be taking the long view and analyze the business and its long-term future
rather than collateral or cash flow in the near term.
With equity financing, there are no payments along the way. Instead,
repayment is based on an exit strategy somewhere down the road. It could be
a sale to another business, a refinancing, or a future round of equity financing
that gets investors back their money plus a return. In other words, there’s no
cash flow demanded from you at the onset. However, you are giving up some
percentage of your company’s future value to investors when you opt for
equity financing, so it’s important to understand the implications of equity
payout. If you give up a 10% stake in your company, depending on the
business’ success or failure, it could end up costing you a lot or a little. If your
business fails, typically your debt is dissolved and you owe nothing and you
have no ongoing liability.
Debt and equity financing both have their pros and cons. Weigh them
carefully before deciding how you’ll access capital for your business.