Whether or not you’re planning to launch a startup or want to expand your business, you are likely to need money. Debt and collateral financing are two different economic strategies you can opt for. Incurring debt entails borrowing money for your company, whereas gaining equity means injecting your own or other stakeholders’ money into your company.
Several 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 cash flow to pay back the loans, plus interest.
Small business owners usually opt for equity financing because they are unsure about qualifying for a loan, or they don’t want to part with cash profits to service the repayment. Traders and partners can provide equity funding.
Advantages of debt financing:
o You do not have to part with any ownership or future profits of your business. Your lender has no control in the way 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 to the owners of the company.
o You can avail tax deduction on curiosity paid.
Disadvantages of debt financing:
o You have to maintain sufficient income to repay the loans.
o You will be using your cash profits to pay back again the loans. You may earn revenue but there won’t be cash to exhibit for it.
o The riskier the loan is, the higher the interest price will be.
o You might have to furnish some sort of guarantee as owner of the business.
o Lender has rights to seize your collateral, in case of non repayment.
o Too much debt might affect your credit rating and your capability to raise money in the future.
Advantages of equity 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 get equity investments.
o Businesses along with sufficient equity will look better to lenders, investors and the IRS.
o Your company will have more cash available since it will not have to make debt payments.
Drawbacks of equity financing:
o You will need 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 in order to run the business.
o No tax deduction on dividend payments.
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Most businesses have a mix of debt plus equity financing. Too little equity can prevent you from securing or repaying loans, while carrying little or no debt could indicate that you are too risk-averse, and that your business might not grow as a result.
Business 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 other companies that are offering business cash advance to small business owners.
Business cash advance is not credit and the organization offering this money advance gets their money from the charge 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 many organizations which provide such cash advances. 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 above mentioned 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 details through my articles. If information is power, you are now empowered to succeed in your endeavor to secure mortgage, there by realize your desires.