Whether you’re planning to launch a new venture or want to expand your business, you are likely to need money. Debt and collateral financing are two different monetary strategies you can opt for. Incurring debt entails borrowing money for your company, whereas gaining equity means treating your own or other stakeholders’ money into your company.
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Many business owners are reluctant about applying for from a financial institution, as it means cut in cash profits. But it could be a good option so long as you have sufficient cash flow to pay back the loans, plus interest.
Small business owners usually opt for equity financing because they are unsure about qualifying for a loan, or even they don’t want to part with cash profits to service the repayment. Traders and partners can provide equity financing.
Advantages of debt financing:
o There is no need to part with any ownership or future profits of your business. Your lender has no control in the way you run your business.
o You can keep your business profits in the company, and enhance the long term value, or use those profits to pay a return towards the owners of the company.
o You are able to avail tax deduction on interest paid.
Disadvantages of debt funding:
o You have to maintain sufficient cash flow to repay the loans.
o You can be using your cash profits to pay back the loans. You may earn profit but there won’t be cash to exhibit for it.
o The riskier the loan is, the higher the interest price will be.
o You might have to supply some sort of guarantee as owner from the business.
o Lender has rights to seize your collateral, in case of non repayment.
o Too much financial debt might affect your credit rating and your capability to raise money in the future.
Advantages of collateral financing:
o Equity contributions do not need to be paid back even if your company goes bankrupt.
o Your business assets do not need to be pledged as collateral to acquire equity investments.
o Businesses with sufficient equity will look better to lenders, investors and the IRS.
o Your company will have more cash available since it will not have to make debt payments.
Disadvantages of equity financing:
o You will need to part with some of the ownership stake, and your business’s profits will be shared by other equity investors.
o You may have to contend with different ideas in order to run the business.
o No taxes deduction on dividend payments.
Many businesses have a mix of debt plus equity financing. Too little equity can prevent you from securing or repaying loan products, while carrying little or no debt could indicate that you are too risk-averse, and that your business might not grow as a result.
Business Cash Advance, a Good Alternative:
But can there be any alternative to loans so far as the little businesses are concerned? Yes, there are many other companies that are offering business cash advance to small business owners.
Business cash advance is not that loan and the organization offering this cash advance gets their money from the charge card sales that the business does inside a specific period, there by reducing the burden of paying back the mortgage and the terms and conditions to qualify for like cash advance are also relatively simple.
There are many organizations which provide such cash advances. Organizations like MerchantCashDirect usually offers cash advance for working capital needs. They more often than not, target specific sectors. To expand the example of above mentioned organization: They seek to provide funds to people into restaurant, retail or even service industry processing at least $4000 in credit card receipts per month.
I hope that I helped clear some doubts and given some useful information through my articles. If info is power, you are now stimulated to succeed in your endeavor to secure mortgage, there by realize your dreams.