Before jumping on any of the above options for funding, it is essential to consider several factors in order to choose the best financing for your business. In a nutshell, the following considerations should get thoroughly thought through.
- How much capital you need exactly
- How is your creditworthiness?
- Would you consider an equity partner, or do you wish to remain as the sole business owner?
- How would you like to repay the capital? In interest payments or equity?
- How well do estimate your business can perform in the short run?
- What type of debt to equity ratio are you comfortable with? What is your ideal leverage?
Once you have made the above considerations, below are some additional tips you can utilize to choose the ideal type of financing. If your creditworthiness is in question and you can’t go to the regular lending facilities such as banks. Then you can opt for equity capital financing. Just make sure you get investors that provide more to the business than just capital. If you would like to remain a sole proprietor in your business, then a loan might suffice. With a loan, you do not have to share equity or control over your business. If your company has the capability to turn a profit from the capital quickly, a loan is better than selling a stake of the company. As long as your business can maintain the monthly payments without hurting in cash flow, a loan is a great choice. In a nutshell, the ideal type of funding for your business revolves around two key factors:
- How soon you can afford to start paying back your lenders or providing returns on investment to your equity investors.
- What best suits your future plans for your business? Shared equity or loan repayments?
How soon you can start paying interest or ROI depends on the strength and validity of your business plan. As for your future plans, it is up to you to weight the differences between Equity Financing and Debt Financing.
Equity enables you to partner with people who can add value to the business, but it also entails you have to share control and decision making with investors. Debt financing, on the other hand, enables you to retain full ownership and control over your business, but you have to incur high-interest rates on the sum borrowed.
Conclusion on the 3 Different Types of Capital Financing
It is essential to remind you that there are other different types of capital financing in addition to the ones listed above. However, the types of capital investments mentioned above are the most common for the average business. Before settling on any capital structure, it is essential to consider the benefits of each option individually. Compare and contrast all available options to ensure you get the best match for your business needs. If you are not satisfied with one single option, it is always advisable to combine two or more capital financing options in order to get the most out of both. Most businesses opt to have equity financing and debt financing in their initial stages. Nonetheless, as the business grows, they can decide to venture into other types of capital financing.
Alternatively, a business owner can decide to:
- Solely rely on one type of capital financing
- Retain both capital financing options
- Scale down or up on the options they deem best for them
- Are you a business owner looking for capital financing? Are you looking for a loan with favorable terms and low interest? Well, get in touch with us today.