SimplyFinance - Business Loan

Pros and Cons of Debt and Equity Financing

2007-08-12T23:00:00Z

When it comes to financing a business, most business people opt for a mix of both debt and equity financing as each has its own pros and cons in certain situations. There is no clear answer as to which of the two is the best. It will depend on the situation, size, profitability etc. of a company as well as the personal preferences of its owner(s).

Debt financing involves the borrowing of money, usually from banks or other financial institutions, to set up or run a business. Equity finance, on the other hand, comes from investors who receive shares or a stake in the company in return for their investment. In this article we will outline the main advantages and disadvantages of each and advise on which is the best choice in certain situations.

Debt Financing: Pros and Cons The chief advantage of debt financing is that all the money comes from banks which do not expect to have any say or stake in your company. Your only responsibility is to keep up with repayments and keep to the terms agreed with the lender. For any business person wishing to keep full control of their business, this is the ideal choice. There are no investors to keep happy, and no one else who has a say in the running and the direction of the company.

Another major advantage of debt financing is that loans can be used to buy equipment and other business assets while business profits are kept in the company. Also, any interest paid on loans can usually be deducted from tax.

However, there are also a number of disadvantages to debt financing. As with any loan, companies will have to show the bank how it is going to repay the money, and they'll have to secure the loan against an asset. The asset will usually be a premises or a piece of equipment that covers the value of the loan. In addition, a bank may require that some kind of personal asset is offered as security. Financial institutions tend to favour companies that have good management, a reliable projected cash flow and good growth potential. Once the loan is secured, the business will then be obliged to service the debt, and they must ensure that payments are made on time each month, even in times of poor business. Loan repayments can quickly eat into profits, and any extra money earned by the success of the business might be going straight back to the banks.

Some debt financing is acceptable, but if a company relies too heavily on this kind of financing it may impact negatively on its credit rating and make it difficult for funds to be raised in the future.

Equity Financing: Pros and Cons There are a number of advantages to equity financing. Not least is the fact that contributions of this kind need not be paid back and neither the business nor any of its assets have to be guaranteed as security to obtain the investment. In addition, the money does not have to be paid back from your personal funds in case of bankruptcy, which is the case in debt financing. If your business has equity then it will be looked on more favourably by investors, lenders and the Revenue Commissioners. A business that has secured equity will most likely have a sound plan and past success, which could convince a lender to give you a loan. A company that relies solely on debt financing does not look good.When it comes to the day to day running of the business, there will be more cash readily available as all profits can be kept within the company and none has to be spent on repaying debts.

However, equity financing has its disadvantages also. The main drawback is that the owner has to give up a share of ownership rights and profits to equity investors. This is a big sacrifice of independence for any business owner. Also, any dividend payments to investors, if applicable, will not be tax deductable.

Conclusion

However, it is worth noting that it is best not to rely too heavily on debt financing as it is not looked on favourably by lending institutions or potential investors. It is important to maintain a favourable debt-to-equity ratio. If the ratio is too low, it may look as if the company’s profits are not being used wisely. You can calculate a company’s debt-to-equity ratio by dividing the business’s total debt by its total equity. A healthy debt-to-equity ratio is seen as being somewhere below 3:1 for most industries.

Both debt and equity financing has its own pros and cons, and it is up to the business owner to decide which is best for them.

If you would like more information on debt financing, take a minute to fill out our simple form, and one of SimplyFinance's representatives will contact you to introduce you to a qualified broker. Your broker will be able to answer any questions you may have, and they'll consider your particular financial circumstances before they search the market for the best debt financing deal for you.

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Types of Business Funding

2007-08-05T23:00:00Z

Starting your own business is exciting and challenging. Unless you have a large personal savings, or are independently wealthy, chances are you will need to secure funding for your business. There are several options for you ranging from business loans, venture capital, government grants, tax credits, to personal credit cards. We’ll look at each of these in greater detail to assist you in determining the best source of funding for your business.

Depending on the nature of your business you might consider a grant. A grant is usually partial funding for a business that you will only need to pay a portion or none back to the lender. Grants are provided to individuals and businesses by the government, regional development agencies, the European Union, business link, chambers of commerce, universities and even charities. Certain industries or locations that are in need of revitalization, businesses that focus on research and development, inventors, farming, and others are all eligible for grants. Typically there are terms to the grant that you must adhere to in order to keep the funding and/or not repay the money.

Venture capital is another common form of business funding. This type of funding is done by companies, trusts, or individuals, also called ‘Angel Investors’, that provide money, start up capital, or loans to businesses as investments. Often its is given to existing companies that are doing well that seek to expand and have a clear business plan with a long term growth potential for both the business and the investor. Often times the venture capital trust or firm will buy out 25-55% of the business. “Seed money” is also provided by venture capitalists, usually with the investor accepting a higher risk with a potential for higher yield.

Another form of business funding is tax credits granted by the government that act as an incentive to companies to stimulate economic growth in various industries. These include businesses that focus on energy efficiency, research and development, and agriculture.

If used wisely, personal credit cards can be used to fund your business. The drawback to using this type of funding is if you are not able to manage your debt it will affect your credit rating. Should you decide to use your credit card, it is recommended they are used for non-essential business items, not for operating expenses or major purchases like a car or equipment and they are paid off each month.

Business loans are one the most common forms of funding for start up capital, to help expand your existing business, or perhaps to refinance debt. The type of business loan to apply for depends on what your needs are. Small businesses can seek funding with a small business loan and many are available for specific industries. Although not all small businesses will be turned away by banks, most banks favour larger or well-established businesses. If you are a small business or a start up, you will need to have excellent documentation, a business plan, and perhaps collateral (such as home equity) to secure a loan from a bank. Business loans are also available for small amounts, called “micro” loans for economic development for a certain geographic areas and for specific industries.

When you make the decision to get started with a business loan, fill out our short form, and a representative from SimplyFinance will put you in touch with a business loan lender that will work with you to answer all your business loan questions, and they'll search the market to find the best business loan deal for you.

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Debt vs. Equity Financing

2007-08-12T23:00:00Z

Every new business must find funding from somewhere. In many cases, an entrepreneur will have money of their own, or money from family and friends, to invest in a business. This is known as equity financing. If this is not possible then the only realistic alternative is debt financing in the form of loans from financial institutions. Here, we compare the two and examine some of the advantages and disadvantages of each.

It is a big choice for any business person looking to set up or expand a company – will they borrow the money the need or look for investors? If they borrow money they will have to make sure they can keep up with repayments, and they need to be willing to face high interest charges.

However, equity financing often means the business person gives up some control in the business, and they'll have to answer to and provide a return to investors. Also, equity financing has a much different effect on cash flow, earnings and taxes than debt financing.

Debt Financing

Put simply, debt financing is the borrowing of money to keep a business running, to expand a business, or to acquire assets. Long term debt financing is usually associated with larger assets such as machinery, equipment or real estate, and it is paid back over many years. Short term debt financing on the other hand is most often used for business operations such as supplies or payroll and is often paid back within a year. Longer term debt financing comes in the form of term-loans, where the term of the loan and the interest rate is agreed with the lender.

Equity Financing Equity offers an entirely different funding option for a business. Normally, equity financing is provided in exchange for an interest in the business. Also, equity investors can ask for dividends or a share of the annual profits. There may also be an issue of the length of the investment. An investor may want to opt out at some point in the future which could force the sale of the business or require the owner to find replacement investment.

It is ideal if the business owner can provide equity financing from their own personal funds. This means they retain full control of the business, and they do not have to answer to outside investors. However, this is often not possible and equity financing most commonly comes from friends and family. For larger incorporated companies, investors would receive shares in the company, but most commonly they receive a share of the businesses’ ownership.

Although there is no restriction on how equity funding is spent, it is usually for start up or the long term running of a business. Day-to-day costs, payroll and other running costs are usually provided through debt financing.

Be Prepared

Choosing between debt and equity financing is a fundamental choice for any business, and it is important that both avenues are well researched and the necessary preparations are made.

Before getting started a business person should take care of a few basic preparations. They should gather the company’s financial records like income statements and balance sheets. It's also a good idea to gather paperwork relating to your own personal finances and the company’s assets as these may be needed if you opt for debt financing. Also, it is worthwhile to calculate how much the business could afford to devote to debt repayments every month. Consider hiring a lawyer to look at the terms of the strategy you choose and to help correct any incorrect negative information relating to your personal or business finances.

It is a good idea to speak with all potential investors to see how willing they would be to provide equity financing and what kind of returns they would expect.

Making the Choice Flexibility is often key in any successful business venture, and the same applies when it comes to choosing financing options. Most businesses use both debt and equity to varying degrees, depending on their particular situation. Too much debt can lead to problems keeping up with repayments to financial institutions, while too much equity can result in the loss of control of the company.

In the end, both debt and equity financing provide an often essential means of funding a business. The right one for a particular business will depend on a number of factors including the size, financial situation, product etc. of the business. There is no clear winner in the debt v equity question, the right choice will depend on circumstances.

If you'd like to speak with a lender about debt financing, take a moment to fill out a short form, and one of SimplyFinance's representatives will contact you to introduce you to a lender that will be able to answer any questions you may have before they search the market for the best debt financing deal available based on your particular need

CLICK HERE TO CONNECT WITH A DEBT ADVISOR TODAY!

What is Debt Financing?

2007-08-08T23:00:00Z

Almost all businesses, big or small, need to borrow money at some point. Whether it is for large assets such as land and buildings, or simply for supplies to keep a business running, debt financing plays a major role in modern business.Put simply, debt financing is the borrowing of money to keep a business running, to expand a business, or to acquire assets. Long term debt financing is usually associated with larger assets such as machinery, equipment or real estate, and it is paid back over many years. Short term debt financing, on the other hand, is most often used for business operations such as supplies or payroll, and it is often paid back within a year.

The alternative to debt financing is equity financing, which involves the acquisition of money from investors and/or savings. However, we will focus on debt financing in this article.

While most companies in Britain receive their financing from internal finance, 39 percent rely on external sources of finance, usually debt financing in the form of a bank loan. The business will agree the term of the loan and the interest rate, whether variable or fixed, with the lender. As with any loan, companies will have to show the bank how it is going to repay the money and secure the loan against an asset. The asset will usually be a premises or a piece of equipment that covers the value of the loan. In addition, a bank may require that some kind of personal asset is offered as security.

Financial institutions tend to favour companies that have good management, a reliable projected cash flow and good growth potential. The business may have to demonstrate that it can meet the monthly payments from projected revenues in its business plan. Of course, the company will have to comply with the payment schedule specified by the lending institution, and it may run into trouble if it deviates from this. Longer term loans are usually provided in this manner.

Debt financing products

Companies looking for debt finance to cover day to day running costs often opt for an overdraft instead of a long term loan, although these are falling in popularity because of high interest rates, steep fines and the obligation to repay on demand.

There are many options currently available for companies looking to avail of debt financing. Factoring and invoice discounting allow small businesses to take loans out against sales, while leasing allows for the borrowing of money to buy machinery or equipment. However, term loans remain the most popular with businesses and with banks. From the point of the view of the financial institutions, it allows them to impose regular repayment schedules over fixed periods, which is less risky than overdrafts. Many companies are known to have fallen foul of the banks because they were unable to repay overdrafts when asked. This provides an overview of the debt financing products available.

Every lending institution has its own products, rules and rates so it is worth while for any business to shop around for an arrangement that suits its needs. Some companies even offer credit cards designed for small businesses to pay for day to day incidentals. However, these can become an expensive luxury if the balance is not cleared every month.

Debt over equity

Debt financing remains more popular than equity financing for a number of reasons. Interest paid on loans can often be deducted against taxes, and debt finance is available in small, accessible amounts, whereas equity finance tends to be in large amounts. Also, with debt financing the lender has no say in how the business is run and has no rights to any ownership or profits of the business. Another advantage is that business profits can be kept within the company while the loan is used for day to day running or the acquisition of assets.

Debt financing is not a suitable option for all businesses. However, for small businesses where equity financing is not an option, it can be a valuable service in the day to day running of operations and the purchase of equipment. While loans often tend to be short term and at high interest rates, debt financing remains a popular choice for many companies.

If you're interested in learning more about debt financing, take a moment to provide us with some information, and a SimplyFinance representative will contact you to discuss what your next step should be. There are hundreds of debt financing offers available out there, so let us shop around to find the best debt financing option for you.

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