Running a successful business means knowing when to expand. Expansion, however positive in the long run however will require some capital. Whether this is to by new machinery or open a new branch, finding the right kind of financing can make all the difference between success and failure. One particular kind of financing that people consider when starting new ventures is equity financing. Unlike debt financing, equity financing is a different, non-monthly payment option that offers a different kind of investing. Lets take a moment to review the advantages and disadvantages of equity financing.
What Are the Advantages of Equity Financing?
1. There Are No Interest Rates to Pay
With equity financing, you are given the money and you only have to pay it back if your company is a success. This means that if the company fails, you will not owe anything. The opposite of debt financing, equity financing means that you are more capable of taking risks with potentially higher returns. In addition, there are no interest rates you have to pay, or monthly payments to whomever provided the capital.
2. There is No Liability
If you are financing your new business through debt equity, then you will be on the hook if the business fails and you cannot pay back the amount you took out to start the business. With equity financing, you dramatically reduce your liability by removing the condition that you must pay back the money.
What Are the Disadvantages of Equity Financing?
1. Release Control of the Company
While equity financing is perfect for those looking to limit the personal risk associated with debt financing, equity financing also limits the control you will have over your company. With debt financing, you have the money, have to pay the money back, but there is also little control or influence on what you are doing with your business. With this type of financing, those that invest in your company can have significantly more say regarding the future direction of the company and recommended improvements.
2. Potentially Owe More Down the Line
There has to be an incentive for people to take the risk and give you money through equity financing. Where as they would only get back the interest rate through debt financing, equity financing means that they can set a condition on the amount they get back in returns. This can or cannot include a limit, meaning that you could theoretically be paying back your lenders a percentage of your profits over the entire course of the business.