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Funding - A Brief Look at Debt vs. Equity
By businessbroad | October 13, 2006
Depending on your level of business knowledge, this title may confuse you. Let me explain.
Basically, there are two common ways to get outside funding for a business. The most common, and the method that most people envision when they think of starting a business, is debt financing. Debt financing is when you take out a loan for a set amount and then you pay back a set amount, usually with interest. Whether your business fails or succeeds, a pre-specified amount must be paid back. If you go under, you still have to make payments. If you’re wildly successful, that doesn’t change anything. The payments are made and you keep all the excess for yourself.
With equity funding, it works differently. You still get a set amount of funding, but in this case, that “loan” gives the lender a claim on your future profits. This can be really great for some businesses, since your liability goes away if the business does (unless you’ve done something really awful and they take you to court over it). If you do well, your lender - more like your partner - gets a proportionate amount of the profits.
I’ll write more about why you might have an easier time getting one or the other, or why one or the other might be preferable for certain kinds of businesses. Stay tuned in.
Topics: General Business |
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