If you own a business, you know that there are times when the company needs extra capital. It could be to help get through a difficult time, to engage in rapid growth, or any number of other circumstances. The two most common options you will have available to raise the money are taking on equity financing, where you give up a certain percentage of ownership in the company, or debt.
These can both be valuable options at different times in the life of a business. Identifying which is right for you can be difficult. In this blog entry we examine several of the primary advantages and disadvantages of debt-based financing.
Advantages of Debt
There are many benefits to taking on debt to get the money you need. First, since you’re borrowing the money from a bank or other financial institution, rather than selling ownership, you are not giving up any control of the business. Another perk is that once the debt is paid back in full, you no longer have any obligation to the lender and they don’t participate in success of the business (unless warrants are issued as part of the debt). You can repay the loan early to end the relationship early if your business has the finances and desire to do so. Debt is also very predictable. You will know exactly what your payment is each month so you there shouldn’t any surprises.
Disadvantages of Debt
Of course, there are some problems you could face when you finance your business with debt. The biggest issue is that you have to repay the debt. With equity financing, you don’t typically repay the investment unless the business is successful, which creates flexibility in your business and creates positive cash flow. Debt can also make businesses more vulnerable to financial ups and downs, especially if they run into hard times and struggle to make payments. The debt will also put restrictions on future growth because capital will be tied up in the repayment of the loan.
Taking the time to weigh both the advantages and disadvantages of debt for your business is very important. Another thing to keep in mind is that what might be right for your business today could be wrong the next time you’re looking for cash for your business. If you’d like assistance thinking through the best strategy to raise the funds you need for your business, we can help. Please contact us today to learn more!