Debt financing or equity financing? - Kiara Fintech

Debt financing or equity financing?

A thriving business needs liquid cash flow to keep expanding and fast, so many businesses turn to different types of financing to maximize the leverage and growth of the business. The types of financing can be divided into two main categories of debt financing or equity financing. But what is it anyway? And which one suits us?

Debt financing

Debt financing is attributed to financing given in exchange for repaying the amount over time while paying interest, of course this sounds familiar to you: a loan. A loan can be taken from different types of institutions that offer different requirements and repayment terms.

Bank loan

The most common loan I know of is a bank loan. Banks offer loans from small amounts to huge amounts. The interest rate varies depending on the size of the borrower and his repayment ability which sells us as a credit rating. Some loans will require different guarantees and different repayment terms. The repayment is a repayment in a fixed amount that will usually be on a monthly basis so that the amount already includes the interest we are required to pay.

Non-bank loans

Beyond the traditional loans of the banks, there are various and varied institutions and companies that will also offer you a loan on different terms. Here, too, an option for different amounts, but not as high as in the bank. The interest rate will usually be high. Some companies will offer a loan on terms lower than those of the bank so that we as smaller businesses will have an easier time getting them.

Credit

Credit also falls into the debt financing category because the payment is monthly and fixed, but here we pay the amount we spent. Credit is a loan because I use the credit company's money with a commitment to repay the company the amount at the end of the month.

Debt financing has advantages and disadvantages, however the amount is fixed and does not change but sometimes this is a big distress on a young business that is having a hard time both repaying the loan and making a profit. Others will prefer the fixed and unchanging amount so that they can be consistent and anticipate the expenses.

Equity financing

Equity financing is raising funds for the benefit of the business by selling part of the business or an agreement on profit sharing with the financing entity.

Donates

A donor is basically a person who usually invests his own money in your business so that you can grow the business and start working on a larger scale. Usually the donor will be a person who believes in the purpose of the business or one relative or another for example family or friends.

Investors

The phenomenon of investors can be seen on various platforms and especially in the field of start-ups. An investor is a person who comes with his own capital and invests in the business with faith and expectation to receive a percentage of future profits and thus return the investment and earn himself as well.

Financing companies for small businesses

There are various companies that are willing to invest in an outside business in exchange for future percentages of the profits. As investors but as an orderly organization.

Advantages and disadvantages of equity financing

Benefits

Limited liability

When an outside investor decides to invest his money, he consciously takes a risk and so if something goes wrong, you will not bear full responsibility for the investment as in a loan.

Non-reliance on credit ratings

Unlike debt financing, financing is based on the potential of the future business and less on the past.

There is no obligation to refund

Unlike a loan, there is no commitment to a fixed monthly repayment that continues regardless of the business.

Support and guidance

When an outside investor is involved, he also has an interest that you will benefit from, so it will often be possible for advice and guidance as well.

Disadvantages

Partial ownership

Because in equity financing you are actually selling a percentage of the company, you will also need to consider the opinions of the investors in the management.

Profit distribution

In return for financing, you will have to share the profits of the business and not put everything in your pocket.

Fundraising

Raising investors is often not an easy job and you will have to "sell" the idea and purpose in order to get financing.

In order to leverage the business we usually need external financing, for many equity financing is the fastest and safest way to increase profits as quickly and safely as possible. Perhaps this is why many internet businesses turn to different investing companies instead of committing years ahead to banks.