Equity loan and business loan are the two options to avail funds for the business. Debt financing or loan is a credit facility where you avail the money from a lender. You promise to pay it back to the lender with interest. It is a business loan – secured or unsecured in nature. The business owner can either think of availing a working capital loan or machinery loan, as per his requirement. The best sources of business loans are banks, NBFCs, and online lending companies.
Equity financing is a process of availing funds where the business owner sells a part or share of the business to raise capital. In a nutshell, he sells off a part of the business to raise funds for business growth and expansion. The equity loan can be availed from friends, family, and from public offerings as well. One of the major disadvantages of availing equity loan is that the business owner has to sell a part of the business to avail of this facility.
Both the ways of raising funds for business has advantages and disadvantages. Now let’s take a look at which option is best for business:
When an equity loan is availed, the business owner has to give up some equity or shares of his business. This means he loses some right over the business as well. However, when a business loan is availed, no equity or shares are sold to the lender. Thus, the business owner has right over the business. And the business is all secured with him.
If you think of availing equity loan, then you also need to know that you will lose some shares of the business to the lender. And with that, the lender will also become an owner (partly) of the business. Thus, he will also take part in business decision making and you will not be able to take the decisions alone. Nevertheless, with debt financing, your business will remain yours and you will have all the power to take a decision and run the business as per your wish.
The small business funding can be repaid over the loan tenure in easy monthly payments. The debt is completely repaid over the time agreed between both, the lender and borrower. And once the loan is completely repaid, the relationship between lender and borrower ends. However, for equity loans, there is no monthly payment. The equity investor gets paid in terms of his share in profit. The relationship between the equity investor and business owner is life-long until the business is closed.
Nevertheless, the business owner has the option to buy the shares back. Or the equity investor as well can sell the share to any other person (investor).
The above said three points clearly state that small business loans are the best option to fund business as compared to equity loan. So, you can take a well-informed decision that will benefit your business in the best way. Additionally, you can also register your business for free at the Connect App by ZipLoan to build your business network. Through the e-marketplace, you can create a business profile, list your products/services, find business, discover new business opportunities, and build connections.