Business owners have more choices today on how to improve their startups as compared to decades ago when opening or improving a business meant going to the bank and asking for a loan. One of the ways an existing business can develop their products and services is through
equity financing. While
most business models don’t appeal to investors primarily because of the risks involved, equity capital should still be considered as one of an entrepreneur’s options.
Equity financing isn’t a loan so you don’t have to worry about repaying it. As long as your business makes a profit, your lenders will be paid. Also the myriad of networks that your lenders are included in may be beneficial to your business as it would increase your credibility and visibility. Like everything else, this type of financing also has some disadvantage and the first one of which is the fact that you won’t have complete ownership of the business so not all decisions would be made by you. If you’re looking for autonomy and control, this type of financing may give you more headaches than others because your lenders would have a say in any business decisions, especially major ones.
However, not all businesses are approved for equity financing because the risk to the potential investor may prove to be too great. So after all the time you have spent networking with various prospective investors, entering contests and what-not, there is still not a guarantee that any investor would gladly give you the money you need.
Debt financing on the other hand is a loan that you need to pay on a fixed term. Sure, it may take you some time to apply for the loan but you might find that this option is preferable especially since you would have complete control over your business, unlike in equity financing. You need to be careful though because over-dependence on your available line of credit may cause you more trouble. Relying too much on your credibility to take out a loan may give you false assumptions that you would still be able to pay up even though your business revenue clearly shows you can’t. If you opt to take out debt financing, you need to ensure that you have the ability to pay your loan back. When the time comes that you need to develop your business by taking out equity financing, investors wouldn’t see you as “high risk”.
