Debt vs Equity as sources of capital for my small to medium sized business
To begin your journey as a small to medium sized business owner, you may need to secure $3,000 to $30,000 in starting capital. As you establish your company, you will need to have these funds available for your initial expenses, including product development and employee acquisition. If you do not have the assets available to cover these costs, you may need to source your seed money from debt or equity based funding options. Understanding the similarities and differences between these two options can help you choose the best one for your company.
Debt Funding
To obtain funding through debt acquisition, you will need to take a loan or line of credit from an established lender and commit to paying the amount back plus interest. You can request the funds from a private lender, bank, credit card company, or organization, such as the U.S. Small Business Administration.
The lender will take a look at your credit history, income projections and business plan to determine if you qualify for the requested loan amount. You may need to secure the funds with collateral, such as your business equipment or inventory, which will be used to cover the loan amount if default occurs.
Upon securing the funds, you will need to start satisfying the payments on the given due date to avoid going into default. The payments are due even if you do not yet have any revenues coming in from your business venture. If you fail to pay the agreed payments, you will lose your collateral and damage your credit.
Equity Capital
Unlike debt sourced funding, equity capital gives you more time to establish your business and generate revenues before any return is expected. For this type of funding, you will exchange shares in your company for investor funds. When your company turns a profit, the shareholding investors receive a percentage of the revenues. Your investors usually expect to see their investment produce these returns within five years of making the initial contribution.
Investors will examine your company plan and projections to determine if they want to support your business endeavors. You must be careful to retain at least 50% of the shares in your company to remain in control of the business. Even so, you must remain aware that your financial backers may wish to have a say in the day-to-day operations of your business in Missouri.
Choosing Between Debt And Equity
You should explore the viability of debt and equity as sources of starting capital for your business before choosing between these options. If you require a professional take on the best option for your small business, consider contacting accountRely for assistance. Your accounting professional can help you estimate your starting capital needs for your St. Louis, MO business to help you choose between debt and equity funding.
