The Advantages and Disadvantages of Equity Funding for Your Business

Growing your business is an exciting process and one that can provide you with many long-term rewards. In almost all cases, however, you will need capital in order to fund the growth… and it has to come from somewhere. In most cases you can either finance the growth through the use of debt or equity. Each of these options has its advantages and disadvantages, and here we will look specifically at equity funding for your business.

Advantages of Equity Funding

Equity funding works when you find an investor for your company and offer them a set amount of ownership in exchange for the cash you need. This option is very popular with businesses and offers many advantages, including the following:

  • No Scheduled Repayment – The biggest benefit of equity funding is that (generally) you don’t have to repay the money to the investor pursuant to a regular schedule. This helps keep your monthly cash flow available for operational expenses and to further grow the business.
  • Shared Risk – Whenever you bring on an investor, you are sharing many of the risks of owning the company. Since the investor is now a part owner, they might be more financially motivated to help you if needed.
  • Debt to Equity Ratio – Since you’re funding through equity, you might not be incurring indebtedness (or at least as much indebtedness as you otherwise would).  This will help you maintain a strong debt-to-equity ratio, which is important if you decide to get a loan later or even if you want to sell the business down the road.

Disadvantages of Equity Funding

Of course, there are disadvantages to this type of funding as well. Make sure you carefully weigh out these potential issues that your business will face with equity funding:

  • Loss of Ownership – Since you will be bringing on one or more additional owners to the company, you will likely be sharing the upside with your new investors.  You may also lose some decision making power by adding investors. These types of details will need to be negotiated at the time of the investment.
  • Long Term Costs – If your business grows significantly over the long term, equity funding can be far more expensive than using debt, because you’re in effect sharing profits with your investor forever.

Equity funding is a great option in many cases, but it is important to carefully weigh your particular situation to ensure it is the right choice. If you do opt to go with equity funding, make sure you work out all the details and have them written into a legal contract prepared by a qualified business attorney. Please contact us today to learn more!

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