Debt Funding Vs Equity Funding: What's The Real Difference?

July 06, 2017

Debt Funding Vs Equity Funding: What

Debt funding Vs Equity funding– Which is the best financing option for my business? This is a question which every business would have especially during the initial phase of establishment. Every business requires capital now and then and choosing the right kind of funding is imperative for your financial stability and business health.

Small businesses and startups are often victims of impractical lending standards and the recessionary fallouts making it extremely difficult for them to thrive in the market and grow. The question about whether you should take a loan for business expansion or look out for a potential investor for your business, always persists. Let us now understand the fundamental difference between the two and help you analyse which would be best for your business funding.

Basically, if you borrow money from a bank, financial institution or a lender with an intent to pay back with a stipulated rate of interest you have opted for debt funding. There are two major types of options in debt funding in India you need to know about:

  • Secured Funding: Through this, you would be offering the lender some kind of security or collateral to assure repayment of the loan. This collateral offered to the debt funding companies can range from providing a guarantor or an endorser, co-applicant, offer an equipment which provides them with around 65-70 per cent of its total value as collateral, securities like stocks or bonds, insurance policies, merchandise or lease payments on the property you wish to lease.
  • Unsecured Debt Funding: Through this, your lender relies only on your credit reputation for passing the loan. This kind of debt financing is usually for a very short period and a limited amount of money at an exorbitantly high rate of interest

 

In the case of an equity funding, you are raising funds through sales of shares and ownership interest. The shares not only refer to the equity shares but also include preferred stocks, convertible stocks, and other such quasi-equity instruments. You would be looking for potential angel investors and venture capitalists who would be interested in your business. If this is what you want to go for you have to further consider whether you would prefer equity funding through family and acquaintances, venture capitalists, look out for angel investors to back your venture, SBA financing, or go for royalty financing. You can also consider Mezzanine financing to have a balance between equity and debt funding.

Debt funding Vs Equity funding

Image Source

Debt Funding Vs Equity Funding- All you need to know

Now that we have discussed the basic definition of both the modes of funding, let us probe further and understand its differences more clearly.

#1. Company ownership

This is the first point of discussion we must enter into when we are having the equity funding Vs debt funding debate. In the case of debt funding for start-up, you would be getting a loan to be repaid back with interest. Here the ownership of the entire property lies with you and no one else can claim any rights over it. You don’t have to compromise on the equity you earn or build in the company. However, in the case of equity financing, you are sharing your ownership with the investors and venture capitalists who invest in your company by purchasing equity shares and stock options. You are thus liable to distribute a chunk of your profit to your shareholders.

#2. Mode of raising fund

The basic difference between an equity and debt funding for business depending on how you get the money. With debt funding, you are borrowing money which has to be repaid. While with equity financing, you are raising money by attracting investors to invest in your venture.

#3. Risk of funding

Every financing option comes with its own share of risks and analysing this while analysing debt funding vs equity funding is crucial. You have to understand the risks involved and who it would affect directly before choosing a financing option. Debt Funding for start-ups comes with an interest rate and has to be repaid in a pre-determined period of time. However, for a start-up, this might be difficult as they might encounter periods of high and low cash flow and would have to always set apart the installments no matter how the business cash flow is.

On the other hand, with equity financing, the entire risk falls on the shareholders and investors as there is no obligation of repayment. Your investors will get their return in case your venture succeeds. This is the best option in case you don’t have limited revenue, little or no profitability to secure a good chunk of money to support your business. But if you have more shareholders, the lesser would be your power to make decisions on the operations of your business.

#4. Ongoing profits

Understanding how your financing option would impact your ongoing profit is imperative before you make your decision in the debt funding Vs equity funding debate. If you choose debt financing, your entire profits would remain within the company as you have control over all your equity holdings. In addition, the interest costs can be listed as a tax write-off. In the case of equity funding, you may not have to divert your revenues to pay loans. However, you still have to share your profits with your shareholders.

#5. Relationship with the financial institution or lender

In the case of debt financing, your relationship with the debt funding companies is only temporary and will end the minute you finish paying back the installments. However, with equity funding, the investors become shareholders of your company and will be a part of your business. If you have a difference of opinion with the investors you might have to cash your portion of the business and let them run it without you. Even otherwise, you can’t function without getting their approval in all business operations. Sometimes these equity financing options cost more than what you would have to pay in debt funding.

 

Debt funding Vs Equity funding

Image Source

In Conclusion

There are a lot of things to consider when you go through the debt funding Vs equity funding debate for your business. Debt equity is less complex and more predictable when compared to equity funding. However, some companies would still choose investors over debt funding companies in case they require a huge chunk of money and zero profitability. You can also go for a mix between the two to balance the negatives of the other and also get adequate funding for your business.

 

Featured Image Source

 

July 06, 2017

Connect with Service Provider

Get connected within 24 hours to pre-screened, trustworthy and small business friendly service providers for Services in top Indian cities

Latest Posts

Top 7 Whiteboard Explainer Video Tips That Talks About Your Business

December 01, 2018

Whiteboard animation videos !! The video style has been trending for obvious reasons. The whiteboard animated videos are known for boosting

Read More  
Facebook Ads | Top 6 Reasons Why Your FB Ads Are Not Converting

November 29, 2018

There were only 3 million active users on Facebook 4 years before; and as of 2018 there are more than

Read More  
Top Facebook Boost Post Tips - Get Results and Generate More Leads

November 13, 2018

Majority of the online marketers who wish to advertise on Facebook and get more leads using Facebook boost posts will

Read More  
Why Should Your Business Hire Explainer Video Company Instead Of Freelancers?

November 10, 2018

We all know the benefits that having a website can help you trigger brand awarenes; overhauling your public image virtually

Read More  
Animation Video Maker | Promote Your Brand With Our Corporate Videos

November 03, 2018

Whether you’re a beginner or already an established brand, SME Networks is an expert Animation Video Maker company that

Read More  
Facebook Ads | Top 7 Effective Tips To Write Facebook Ads That Convert

November 01, 2018

I’m constantly on Facebook, scrolling through my company feed reading the news and looking at pics…I’m not

Read More  

Latest Events

CLO Engage Summit

Date: 10 January, 2019 - 10 January, 2019

India Investment Conclave

Date: 11 January, 2019 - 11 January, 2019

11th Global Intellectual Property Convention

Date: 17 January, 2019 - 19 January, 2019

PanIIT Conclave 2019 Artificial Intelligence

Date: 18 January, 2019 - 19 January, 2019

Mobile And Digital Marketing Summit

Date: 27 November, 2018 - 27 November, 2018

Emerging HR Summit

Date: 18 December, 2018 - 19 December, 2018

PITS - Pharma IT Summit

Date: 28 November, 2018 - 28 November, 2018

World AI Show - AI, MI & Robotics

Date: 22 November, 2018 - 22 November, 2018

TEDx IIFT Delhi

Date: 21 October, 2018 - 21 October, 2018

Decathlon India Run

Date: 14 October, 2018 - 14 October, 2018

8 thoughts on “Debt Funding Vs Equity Funding: What’s The Real Difference?”

  1. Good day. I am a private loan lender that gives out both business and personal loans to individual at a low interest rate of 2% no matter your location. If you are interested Contact me (Whats App) number:+917310847059 sumitihomelend@gmail.com Mr. Sumiti

  2. Testimony You should not miss this opportunity [My name is Mr. Glenn Stijlemans. I live in Germany and i am a happy man today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family.I was in need of a loan of 50,000.00 euro to start my life all over again as i am a single father with 3 sons. I have been searching for a loan to settle my debts for the past three months all I met scammed and took my money until I finally met a God sent Lender. I never thought that there are still genuine loan lenders on the internet but to my greatest surprise i got my loan without wasting much time.I met this honest and GOD fearing man loan lender that help me with a loan of 50,000.00 euro. He is a GOD fearing man, if you are in need of loan to solve your problems and you will pay back the loan please contact him tell him that is Mr. Mohd Taj that refer you to him. Contact Mr. Mike Harris, via email: (servicepersoonlijke.aanbieding@gmail.com)

  3. Bent u op zoek geweest naar financieringsopties voor uw nieuwe huisaankoop, bouw, onroerendgoedlening, herfinanciering, schuldconsolidatie, persoonlijke of zakelijke doeleinden? Welkom in de toekomst! Financiering gemakkelijk gemaakt bij ons. Neem contact met ons op aangezien we onze financiële dienst aanbieden tegen een lage en betaalbare rente van 3% voor lange en korte leentermijnen, met 100% garantielening. Geïnteresseerde aanvragers moeten contact met ons opnemen voor verdere procedures voor het verwerven van leningen via: joshuabenloancompany@aol.com

  4. This is to inform the general public Male or Female who are healthy
    and 100% serious in buying or selling kidney. You should urgently
    contact Nathan Kidney TRANSPLANT HOSPITAL. As we have a lot of
    patients who are here for kidney transplant, Are you seeking for an
    opportunity to sell your kidney for money due to financial break down
    and we shall offer you $500,000.00 USD for your Kidney. My name is Doctor
    David Samadi ,i am a Nephrology in Nathan Kidney
    TRANSPLANT HOSPITAL. Our hospital is specialized in Kidney
    Surgery/transplant and other organ treatment, we also deal with buying
    and transplantation of kidneys with a living and healthy donor.We are
    located in India.Nigeria,United Arab Emirates,USA and all parts of the
    country. If you are interested in buying or selling kidney please
    don’t hesitate to contact us via email: doctordavidbsamadi1@gmail.com
    us Please Note: Internet there are a lot
    of people with different motive, So Please be sincere and truthful we
    are not kid, this is about saving lives of others.Fraudulent is not
    accepted please. Best Regards…

  5. This is to inform the general public Male or Female who are healthy
    and 100% serious in buying or selling kidney. You should urgently
    contact Nathan Kidney TRANSPLANT HOSPITAL. As we have a lot of
    patients who are here for kidney transplant, Are you seeking for an
    opportunity to sell your kidney for money due to financial break down
    and we shall offer you $500,000.00 USD for your Kidney. My name is Doctor
    David Samadi ,i am a Nephrology in Nathan Kidney
    TRANSPLANT HOSPITAL. Our hospital is specialized in Kidney
    Surgery/transplant and other organ treatment, we also deal with buying
    and transplantation of kidneys with a living and healthy donor.We are
    located in India.Nigeria,United Arab Emirates,USA and all parts of the
    country. If you are interested in buying or selling kidney please
    don’t hesitate to contact us via email: doctordavidbsamadi1@gmail.com
    us Please Note: Internet there are a lot
    of people with different motive, So Please be sincere and truthful we
    are not kid, this is about saving lives of others.Fraudulent is not
    accepted please. Best Regards…

  6. Do you need a loan???? Personal loans or Business loans???? Talk to me about it. CONTACT NAME: Mr Petr Buzek, If interested, please contact us at::::::petrbuzekloanfirm@gmail.com
    Whatsapp now: +639451256230

  7. Do you need a quick long or short term Loan with a relatively low interest rate as low as 3%? We offer business Loan, personal Loan, home Loan, auto Loan, student Loan, debt consolidation Loan etc.. no matter your credit score.
    Personal Loans (Secure and Unsecured)
    Business Loans (Secure and Unsecured)
    Consolidation Loan and many more.

    Contact US for more information about Loan offer and we will solve your
    financial problem. contact us via email: muthooth.finance@gmail.com
    Phone number: +917428831341 (Call/What’s app)

  8. Do you need a quick long or short term Loan with a relatively low interest rate as low as 3%? We offer business Loan, personal Loan, home Loan, auto Loan, student Loan, debt consolidation Loan etc.. no matter your credit score.
    Personal Loans (Secure and Unsecured)
    Business Loans (Secure and Unsecured)
    Consolidation Loan and many more.

    Contact US for more information about Loan offer and we will solve your
    financial problem. contact us via email: muthooth.finance@gmail.com
    Phone number: +917428831341 (Call/What’s app)

Comments are closed.

-->