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Understanding Debt Funding Vs Equity Funding In Startup

debt funding vs equity funding
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STARTUP

Understanding Debt Funding Vs Equity Funding In Startup

One of the most vital elements required for the growth of business in startups or any other companies is financing. Well, every organization needs sufficient amount of capital to survive in the market and there is no denial about this fact. One of the most important decisions that entrepreneurs need to take is about the ways in which they can finance their startups. However, most of the time they are confused about choosing the correct option between debt funding and equity funding. Well, both these options have their own pros and cons. Let’s have a look at them one by one:

Debt funding

The best thing about debt is that it is less costly as compared to equity. This is because the interest rates associated with debts are less than the return amounts which are expected by the investors. The biggest advantage of debt funding is that you get to remain the sole owner of your own business. However, debt funding has its own disadvantages. For instance, debt does not provide much flexibility in terms of periodic or constant interest payments. Sometimes, debt payments may cause cash crunch in certain seasonal businesses thereby bringing their downfall. It is a known fact that debts need to be guaranteed as a result of which their personal assets are subjected to become liabilities.

Now, what are the situations when a startup should actually think about adopting debt funding? Let’s have a brief talk about them. First of all, debt funding comes to use when the money is being used for fixed assets. Moreover, it should be taken only when the lenders are looking for capital in the form of security interest. Moreover, startups should take debt only when there business is in need of a line of credit. This will help them in paying interest according to the amount of money drawn by them.

Equity funding

The best thing about equity funding is that it provides a lot of flexibilities as compared to debt funding. For instance there is no requirement of collaterals and the terms and conditions are being decided according to the needs of the business. Another best thing about equity is that repayment needs to be done only when someone is able to acquire some amount of profit. Moreover, the businesses can draw larger amounts of money without any hassle when it comes to equity funding. But the biggest disadvantage of equity funding is that it happens to be very expensive. This is because most of the time, the investors demand for a higher rate of return. Moreover, they also tend to ask for some amount of ownership rights for the business which becomes a matter of great concern for the founders or the team.

So, what are the situations in which equity funding becomes handy? Well, those startups which require larger amounts of capital can totally rely on equity funding. Moreover, equity funding also comes to the rescue during the launch of new products or services.

Conclusion

Both debt and equity funding have their own advantages and disadvantages. So, it totally depends on the startups regarding which option of funding is more suitable for them depending on their requirements and situations. However, it is highly recommended by experts to go through the details of both equity and debt funding in order to prevent any issue in the mere future.

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