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Business Financing : Owe or Owned?

In a particular stage of business life, it will need to make quality decisions on how to grow, expand and develop. This phase will lead to the significant question- How do I finance my business?

Business owners are always faced with decisions of how to finance their operations. Do they seek for other investors outside thereby sharing control of the business or do they borrow more money to finance their operations?

When a business is being financed with equity money received from investors, there is less risk, room for long-term planning, and the owner is relieved of the pressure to meet deadlines of fixed loan payments. Equity financing also does not take funds out of the business.

In equity financing, there are no repayment obligations, unlike a loan. However, sharing of profits made, partial or full loss of control, disagreements on management styles and often seeking permissions with the investors when making major decisions are some of the limitations of financing a business with equity.
Sourcing for funds externally to finance the growth and operations of a business can be the best decision when done within a reasonable limit.

Financing a business with debt does not dilute the owner’s portion of ownership since taking out a loan is only temporary. Lenders can not easily claim future profits generated from the business operations, the relationship ends when the debt is repaid. Also, it helps secure tax savings on debt (that is, interest is tax-deductible), makes planning easier and faster

The terms in sourcing for debt may require collateral which might be needed as a form of additional security to assure the lenders of getting their money back as when due. Businesses with unpredictable cash flows might have difficulties making loan payments as debt financing require equal installment payment, which means any late payments because of cash flow issues could put the business at risk. Debt obligations must be paid to lenders irrespective of the success or outcome of the business. Business owner solely bears the risk of failure and in some cases, interest rates are extremely high.

Generally, when a business is financed through debt within an acceptable limit, it gives room for expansion and can be a less expensive source of growth capital. It enables a small business to leverage a small sum of money into a much larger sum without the owner giving up any control of the business as they do with equity financing. Taking on debt is almost always a better move than giving away equity in your business.