Financing your new business: equity or loan?

By: Victoria Harrison

Date: 3 September 2018

Financing your new business: equity or loan?For those who decide to go down the rabbit hole into setting up a business, there is plenty at stake, and just getting started can be difficult. One of the main reasons for this is that initial costs can be high (depending on the type of business), and so funding from external sources is often needed.

Selling equity is a very popular way to fund a start-up, as is taking on debt by receiving a loan. Here are a few of the advantages and disadvantages of each method, and how to maximise your chances of success.

Equity funding

Those who have tuned into the popular TV show Dragons' Den will no doubt be aware how tough it can be to acquire funding through angel investment.

To be able to sell equity to investors, start-up owners must have a promising business plan which they can effectively pitch. They must also decide how much of the business's equity they want to sell, and how much they want to sell it for.

One of the main advantages of this funding method is that nothing changes in the business except the ownership structure, and you do not have to sell off any assets (which would reduce operational capabilities).

Business loans

Going to your bank used to be one of the most popular methods of applying for loan finance, but since the financial crisis almost a decade ago, many have shut their doors to what they perceive to be risky start-ups. That said, other independent lenders are available.

Whilst taking on debt means that the business must make regular, potentially substantial, repayments, it also means that you retain full ownership and are entitled to keep all the profit your business makes.

On the other hand, if the business goes under, you will still have a debt to pay. This is as opposed to equity funding, where your investors take the financial hit.

Which funding method is best?

The truth is that each of these methods are suited to different business types. Like currencies in forex trading, start-ups can be incredibly volatile, and both investors and lenders will have different levels of risk tolerance.

Equity funding may give you access to greater funding amounts and access to the investor's experience and a guiding hand. On the other hand, a loan may be simpler and steadier, and ensure the business remains yours in the long run.

Ultimately, it is down to each individual entrepreneur to choose the right method for their needs/goals. Make sure that you know your business's facts and figures and its growth potential to maximise your chances of getting the right funding.

Copyright © 2018 Article was made possible by site supporter Victoria Harrison