The difference between debt financing and equity financing
There are a range of different options available to businesses that need to secure extra funding in order to grow; debt financing and equity financing are just two of them.
What is the difference between debt and equity funding and which of these options is right for your business?
What is debt financing?
Debt financing is the act of borrowing money from a lender that must be paid back, with interest, at a later date. Common examples of business funding that fall into the category of debt financing include term loans, cash advance loans, invoice finance and asset finance.
What is equity financing?
Equity financing is a way of raising capital by selling shares of your business – this might be to experienced investors, a venture capital firm, or even to the public.
While this form of business funding does not leave your business liable to make regular repayments like debt funding, it does mean diluting the ownership of your business. This may affect the power you hold in the process of decision making and business control, as well as affecting the percentage of the profits that you, as the business owner, are entitled to.
Debt financing vs. equity financing: which is better?
Debt financing and equity financing both come with their own pros and cons – even then, the advantages and disadvantages vary between each individual business case. When sourcing funding for your business, it is important to consider not only how easy it would be to secure capital under each system but how it would affect your business going forward, too.
For example, equity financing might better suit a business owner who does not want the pressure of meeting a loan repayment schedule and is happy to relinquish a percentage of their control over the business to parties willing to invest. In fact, for younger and less-established businesses, the input of a professional investor or investment firm may be a valuable part of the relationship.
Conversely, businesses that are slightly more established, that are ready to scale-up, or have already gone through an equity round, are likely to be more interested in a cash injection that does not require further equity dilution. A more established firm is also more likely to have visibility over future revenue and so will be able to better consider the serviceability of debt.
Depending on the business’ stage of growth, debt can also work out to be a cheaper option than equity, as the business retains complete ownership of their future success – and future profits.
Flexible business funding with Growth Lending
Growth Lending specialises in providing businesses with the funding that they need to thrive.
We offer a range of debt financing solutions, from significant sums of growth and working capital, to cash flow lending and international invoice finance. We work on a case-by-case basis to ensure that every business we work with is offered the most suitable solution for them.