The Advantages and Disadvantages of Debt and Equity Financing

The Advantages and Disadvantages of Debt and Equity Financing

As a small business owner, there are several challenges that you must overcome for the venture to reach its peak in the market. Sustainably financing the business operations is among the things you must prepare for. This can, however, be tricky when you lack a financial plan. For this reason, looking for funding options such as debt and equity financing becomes beneficial to your needs.

Advantages of Debt and Equity Financing

Higher Cash Flow

While there are other financing options that you can consider for your business needs, most of them take funds out of the venture affecting its operations. This is, however, different when you consider equity financing as it allows for a higher cash flow, making the business sustainable.

There are Fewer Risks

Unlike other types of loans or financing options, there are no fixed monthly loan payments with equity financing. This means, as a small business owner, you can concentrate on making the venture grow in the early months without the worries of repayments.

It is a Long Term Planning

When you work with an equity investor, you have a long-term partner too. This means you have time to focus on building the business as investors do not expect an immediate return on their investment.

Credit Problems

Your credit problems have little impact on the loan application process. If your bad credit report made it hard to secure other types of loans, debt financing is the alternative.

Disadvantages of Debt and Equity Financing

Loss of Control

As the business owner, you will have to give up some control over the additional investors you invite to the venture. This means that equity investors will have a voice in the business’s decision-making process.

Cost Can Get Higher

With equity financing, the investors expect to receive a return on their efforts and investment. As the business owner, you must divide and share the venture’s profits with the partners. In some cases, the amount shared can be higher than the rates on the debt financing.

Fixed Payments

When you consider debt financing, some lenders might include fixed rates in the principal and interest payments. This can be hectic in a business with unpredictable cash flow leading to serious problems.

Do you want more information about debt and equity financing? Get in touch with Diamond Capital Financing today.