There are a lot of components to running a business successfully. Financing is considered to be the primary one. Unless you can finance your venture, you cannot begin and continue operations. There are generally two main financing options available, apart from putting only your own money into the venture. You can opt for debt financing or equity financing.
Debt financing involves borrowing money for running a business. No matter whether your venture is successful or not, you will be required to repay the borrowed sum plus interest. The most common form of debt financing is the bank loan, even though there are other options as well.
Equity financing involves selling a share of your company. Basically, you get an investor to put money into your venture and, in turn, the investor gets partial control of the company. The person or company investing in your business will have a share of the profits as well. Similarly, if your company fails, the investor will lose their money.
The logical question to ask now is which option is better. Some people who have little experience in running a business will say that equity financing has many more benefits and virtually no drawbacks when compared to debt financing. However, this is not exactly the case.
Getting a business loan certainly hides a lot of risks. You may not be able to repay it if your company fails. It is also possible for you to be on the losing side if you have to pay more to the bank than you actually make from your venture. In addition, you will most likely have to take out a secured loan which will put major collateral at risk. On the other hand, by using debt financing, you will be the sole owner of the capital and take all managerial decisions without having to share profits or make compromises.
Indeed, these are the major drawbacks of getting equity financing. An investor will have a say on all questions regarding the company, especially if you give them a considerably large share. In addition, if your venture becomes a success, you will have to split virtually every penny of profit with the investor. Still, you will get the investment you need in the beginning without assuming the risk of having to repay the borrowed sum plus interest.
Overall, it is up to you to decide which option to choose. You can decide to use a combination of both. Just base your decision on the investment you need for running a business.