Small business owners are regularly faced with the dilemma of financing their business and expanding their companies. Now, the question is, do they seek other investors or borrow money? This decision depends upon several factors like how much debt the company currently has, the future of the company’s cash flow, and how comfortable is the business owner working with the other partners.
Kavan Choksi- know the difference between debt and equity
According to business and finance expert Kavan Choksi, debt and equity are two major types of business capital for your company. When you increase equity capital, also known as share capital, you give the investor shares of your company’s stock in cash. This stock is the ownership share in the business. When you know its pros and cons for your business’s future, you can decide on the volume of equity financing to opt for.
What is the advantage of small business equity financing?
When you resort to equity capital for funding your business, you have no obligation to repay the initial investment of the equity investor. Moreover, you do not have to make interest payments on the equity-financing amount you receive. In the case of debt capital, you need to repay the principal you have borrowed with regular interest payments. You may distribute a portion of your profits to your equity holders as dividends, or you can skip them altogether if you want. This step will help you keep your small business afloat with some flexibility.
The risks are lower
When your business deploys more equity over debt, bankruptcy risks are low. For instance, if you wish to finance the business you own with equity and the year for you is terrible, your investors will not be happy, and the only thing you can do is hope that things will get better! On the other hand, if the company suffers from a setback and fails to make the interest payments, the creditors will force it to go bankrupt. Equity investors do not have these rights and should wait for potential downturns to enjoy the benefits of the business as it grows. It is important to know the market and the existing scenario before you take any kind of step. Don’t rush or take any kind of hasty decisions.
According to Kavan Choksi, bringing in small business equity investors for your company is an advantage. Since they are concerned about the growth of your business, they will always have a vested interest in your company to success. If these investors have solid business experience, influence, and connections, they could transform a struggling business into a thriving one. Besides the above, they can also increase your company’s chances of attracting more funds that you need in the future for improvement.
The only downside of small business equity financing is that you need to give the investors a part of the business’s ownership. They will have controlling rights, and for every change and decision in the company, they will have the right to vote.