There are many stages of the business life cycle where additional funding may be required. Start-up, growth or even due to some tough times in the market, funding needs to be sought in order to supplement the cash flow and ensure that business activities can continue during the relevant period.
Fundamentally, there are two main sources of funding, Debt and Equity and both of these have their pro’s and con’s. When determining which is the most appropriate for you, there will be a number of areas you need to consider:
- Ease of application
- Providers rate of return
Debt funding, as can be determined from the name, is basically loan funding from any one of a number of different sources, whether they be banks, retailers, suppliers, finance companies or even family and friends. The following are some of the advantages and disadvantages of debt funding.
- There is no dissolution of control of your business
- All profits still flow to you as the business owner
- Interest paid on the debt is tax deductible
- You will have to pay the debt and interest back to the lender
- The interest will mean a reduction of profit in the business
- New businesses can struggle to find a lender at a reasonable interest rate
- Non-payment of the debt can lead to your business closing down
Alternatively, Equity funding means that you have been given funds in return for a share in your business. This can also be provided from a number of sources such as yourself, family & friends, private investors and venture capitalists. This also carries a number of advantages & disadvantages
- The funds will not need to be repaid
- Less risk as you don’t owe any money
- Your investors may be able to assist or advise you in running the business
- Investors will be likely to put more in once you have shown them a return on their investment
- You no longer own all the business
- It isn’t a quick process to get funds from investors who will want to see a range of financial and other information
- You may not get an investor that is a good fit for the business
- You could risk relationships if the business fails
Whichever path you decide, ensure you get professional advice before you dive in headfirst and make a decision you may come to regret.