Securing appropriate funding: Equity vs debt




When starting a new business, most entrepreneurs and start-ups are faced with how to finance their venture. Many financing options are available, and it is very necessary to select the most suitable one.


Before considering the source of funding, you will need to establish whether you will be a start-up or a small business. These terms may seem similar, but they are different.


A start-up refers to a company or project established by one or more entrepreneurs to produce a unique product and sell it to a fast-growing market. As a start-up, you may be looking for major investment from the outset.


On the other hand, a small business does not necessarily produce a new or unique product, they grow at a steady pace and the main goal is to make a profit. This type of business may look for business loans to meet their funding goals.


Looking at these two ventures, it is quite clear that they require different financing strategies. Having understood how the type of venture would decide the financing strategy, next we will look at the different funding options available.


A common option for funding is through equity. Equity financing involves raising capital for a business by selling shares in the business. For small businesses, the owner may be required to invest about 25% to 50% initial funds before seeking external equity from outside sources such as; angel investors, venture capitalist institutional, and corporate investors. Most small businesses opt in for equity financing.


Business owners can also choose to fund their ventures with debt financing, which involves borrowing money which is subject to repayment with interests. This option is available to start-ups that have been able to demonstrate their potential to be profitable and thus repay loans. One of the benefits of debt financing is that once the loan is completely paid, lenders have no claims to the business whereas in equity financing the investors and shareholders have a permanent stake in the ownership and operation of the business.


Furthermore, a business owner can decide to combine both equity and debt to finance their businesses. Doing this balances the pros and cons that arise from sticking to one source of funding. However, this needs to be done strategically and with the help of a financial adviser.


We, at OVAC Group, have helped businesses to identify and obtain the appropriate funding. For more information, email us at enquiries@ovacgroup.com

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