Funding for the Business
There are various approaches that individuals or organizations can consider to fund their businesses. New businesses can choose between taking a loan and seeking equity to propel their financial requirements (Coleman, Cotei&Farhat, 2016).
- Most important Factors in Determining Funding through Equity or Loan
If I want to fund my venture through equity or loan, the essential factors I would consider include my business’s long-term objective, affordable rates, borrowing terms, and business ownership.
Long term Objectives
As the company’s proprietor, it is essential to acknowledge what the company aspires to achieve in the coming years, the purpose of the business, and where the business projects to be in the next ten or thirty years. By identifying these factors, it will be less complex to decide the best funding for my business.
Accessible Interest rates
Usually, the possible cost of selecting equity over credit finance will be significantly delimited by the amount the individual needs to pay to acquire funds. If I access low-interest valuations, the total cost of lending will be comparatively lower (Coleman, Cotei&Farhat, 2016). To guarantee that I am receiving competitive rates from potential creditors, it will be essential to distinguish various alternatives before concluding.
Ownership of the Business
Typically, this factor applies when considering taking equity finance. Equity obligates the business owner to sell partial ownership to the investor, to a certain level, handing over control. To ensure that I still have the overall supervision, I would maintain 51% and sell 49% of the ownership. This factor is significant for individuals given that, to some extent, the owner might lose the full license to the investors.
Borrowing Terms
There are various elements banks will observe when considering issuing a loan. This factor is essential given that lenders may request elements such as financial background, debt-to-equity rates, monthly set options, and overall sales plan (Fianto, Gan, Hu &Roudaki, 2018). These are factors that an individual should consider before seeking a loan over equity to start a business.
Another factor to consider is collateral. To acquire a loan from the bank, individuals are obliged to have something to present as collateral in case the loan is not paid. Equity comes in as the best option considering that investors do not require guarantees. Investors anticipate significant rewards for big risks (Fianto et al., 2018). Moreover, considering that business will encounter a recession in the first two years, this will present significant challenges to the company in paying the loan and the interest.
- Projections in Five Years
If I meet all the projections, I will be happier in the next five years since I chose equity over a loan. Equity provides a significant boost to new businesses with the potential to expand. Moreover, by choosing equity, it will be easy to overcome the first two years of recession, given that I will not be obliged to pay any loan.
- A Case of Bankruptcy in Five Years
In case the business goes bankrupt in the next five years, I would still prefer equity since I will be able to operate without debt. With a loan, the company increases future liabilities. I prefer seeking equity rather than a loan to various factors. Not every business starts to generate profits as soon as it launches. Equity is considered as the best choice for businesses that need a sizeable infusion of operating cash to sustain their businesses before it starts producing profits and overcome the first rough years.
References
Coleman, S., Cotei, C., &Farhat, J. (2016). The debt-equity financing decisions of US startup firms. Journal of Economics and Finance, 40(1), 105-126.
Fianto, B. A., Gan, C., Hu, B., &Roudaki, J. (2018). Equity financing and debt-based financing: Evidence from Islamic microfinance institutions in Indonesia. Pacific-Basin Finance Journal, 52, 163-172.