Unless like Jaime Laing you have a McVities empire of wealth to build on, there is a high chance you will be looking for financing to support your business as it grows. There are many financing options for small businesses, from traditional bank loans to alternative loans, business credit cards, factoring services, crowdfunding and venture capital. With the selection available, it can be difficult to easily get to grips with what they mean and determine which option is right for you and your business.
The first thing to know is that there are two broad categories of financing available to businesses: debt and equity. Figuring out which avenue is right for your business can be confusing, and each option has its own set of pros and cons.
What is debt financing?
Many of us are familiar with the concept of loans, you may have experience in borrowing money for a mortgage or for University Tuition fees. Debt financing a business is much the same. The borrower accepts funds from an outside source and promises to repay the principal plus interest, which represents the “cost” of the money you initially borrowed. Debt financing is widely available and is a popular avenue for businesses because terms are often clear and finite and importantly owners retain full control of their operations, unlike in an equity financing arrangement. However, some debt financing options can have steep interest rates and it is important to assess your ability to meet the repayment and interest terms. Another consideration is the potential for personal financial losses if it becomes impossible to repay the loan – whether a business owner is risking their personal credit score, personal property or previous investments in their business.
What is Equity financing?
Equity financing means selling a stake in your company to investors who hope to share in the future profits of your business, perhaps even a voting stake in company decisions depending on the terms of the sale. There are several ways to obtain equity financing, such as through a deal with a venture capitalist or equity crowdfunding. Compared to debt financing, equity financing is harder to come by for most businesses. This type of funding is well suited for startups in high-growth industries, such as the technology sector, and requires a strong personal network, an attractive business plan, and the underlying business (product, customer demand, team, etc) to back it all up. For businesses that successfully secure equity funding they will have capital on hand to scale up and will not be required to start paying it back (with interest) until the business is profitable. Important point to be aware of is if you relinquish more than 49% of your business, even to separate investors, you will lose your majority stake in the company. That means less control over company operations and the risk of removal from a management position if the other shareholders decide to change leadership.
The British Business Bank offers an independent introduction to various examples of financing types within both debt and equity financing, what they will mean for your business and important things to know before making your decision. Click here to read the full report: The business finance guide: A journey from start-up to growth. Ultimately, many companies use a mix of equity and debt options available and the mix will likely change as your business does..
The BBB also offers a helpful finance hub where you can search for funding options available to you. After completing a simple questionnaire, you will be presented with a list of options available to you based on the financing need, amount, business stage, sector, and region.