Debt Financing vs. Equity: What’s Right For Your Business?
When it comes to financing your business, how do you know what is the right option for you? Is it through debt financing via options like asset-based lending or bank loans, or should it be through equity financing? This is one of the most important business decisions you’ll ever make, so knowing all the facts is key to determine what’s most important to you when weighing the advantages of each.
We are the first to know that debt can be a scary word. No one likes to be in “debt,” which signifies you owe money. Equity is typically the more popular method since it has a respectable ring to it. But when it comes to debt financing, you can actually save money in the long run. Here, we point out some facts you might not be aware of.
Keeping control of your business
If the word “debt” intimidates you, think of the word “surrender.” With equity financing, you are surrendering some ownership of your business. With debt financing, the loss (or surrender) is simply what you owe in the payment for that month. Once your debt-finance loan is paid back, there is no further liability. Longer-term equity financing is not as flexible, and thus not as easy to manage on your terms.
Debt can actually be far cheaper
Contrary to the negative connotations connected with the word “debt,” choosing debt financing can ultimately save you money. Sounds strange, but it’s true! While you have to pay the loan back, once it’s completed, there is no further liability on your part. Additionally, some forms of debt financing, like asset-based lending, is flexible, secure, and can even be scaled to grow as your business prospers. Depending on the conditions of the loan, you might even be eligible to claim deductions on your taxes. That’s bonus savings for you!
Example of savings:
Consider, as an example, a loan amount of $1MM for a company that is generating $4MM in sales. With debt-finance – specifically asset-based lending – a $1MM line of credit would cost the company 9 percent per year (or $90K per year). Over the course of two years, the deal winds up costing the company $180K. On the other hand – with equity financing – if the company surrenders 25 percent of its business for $1MM, the company then sells for three-times its revenue, bringing the equity costs to $3MM. Obviously, debt should always be cheaper in the long run.
Debt is easy to unwind
We like to compare debt to dating and equity to marriage. Debit is very much like dating. It can be as short-term as you want. If it works out, it’s a relationship that completely enriches your life. If it doesn’t work out, it’s easy to unwind and kiss it goodbye. Equity is like marriage. You are partnered in a long-term “set-in-stone” commitment that’s tough to dissolve should there be trouble or difficulty.
As we noted before, we believe that debt should ultimately be cheaper in the long run. And debt financing through asset-based lending is an effective way to achieve this.
Care to know more about how asset-based lending can help your business or entrepreneurship? Find out more about Gerber Finance and how we can help you. We are the perfect matchmakers to set you up with the loan that’s perfect for your growing business.