Arguably the biggest competitor of debt financing when it comes to small business funding is equity financing, or selling shares of a business to investors in exchange for capital.
Equity financing is often perceived as the better option because it offers higher amounts of money (sometimes more than $10 million) and unlike a loan, the sum doesn’t need to be paid back. You won’t have anyone to repay if the investment or your business fails.
But critics of debt financing are typically unaware of how much the business has changed as of late, particularly the emergence of alternative lenders that lack the disadvantages of the traditional loan process. For example, anyone who is currently choosing between the two options should know that alternative business financing companies offer several funding programs that do not involve fixed, monthly payments, due dates, personal guarantees, or collateral.
DEBUNKING THE MOST REGURGITATED LOAN MYTH
These programs include a business line of credit, in which payments are directly based on how much you borrow each month, and Merchant Cash Advance, which provides a lump sum in exchange for a fixed percentage of credit card sales.
The latter is extremely advantageous for businesses that experience occasional dips in revenue because the brunt of the loan doesn’t have to be paid back until business is booming during your company’s most profitable time of the year. This allows you to grow your business without worrying about being able to pay your bills and employees at the end of the month, even when sales are down. You can take all the time you want to pay off the loan, and the more spread out your payments are, the lower your interest rate will be.
ELIMINATING AN OUTDATED PRACTICE
Alternative business financing companies do not ask for personal guarantees or collateral for either program because borrowers rarely have trouble paying them off. Such requirements add unnecessary stress to an already stressful situation. Besides, borrowers can only qualify if their businesses are performing well enough to pay off debt while covering day-to-day operations, as opposed to simply possessing a high credit score or expensive property.
Businesses looking for equity financing tend to lack consistent cash flow or belong to unstable industries but with the right program, borrowers from virtually any industry can pay off debt as long as a revenue boost lies ahead. Now that that’s out of the way, let’s debunk some more misconceptions, this time in regards to equity financing.
THE DANGERS OF GIVING YOUR BUSINESS AWAY
Unless your investor has agreed to give you full autonomy, you will have to sacrifice a certain degree of managerial discretion to investors since your business wouldn’t be able to exist without them. And the goals of investors might not align with yours. Investors want whatever makes them the most money by the time they need it, and it’s not like you’re in any position to say “no” to their opinions.
This power struggle could do serious damage to businesses that value a unique company culture or work environment. Numerous studies have shown that the hardest-working employees view their bosses as friends, and this will likely not be the case if employees know their “friend” is taking orders from someone who has never met them. Equity financing is among the few reasons why an employee who helped start a company could be replaced by a younger employee who can do the same job for half the salary.
Forfeiting a share of future profits could additionally prevent you from receiving the full reward of your hard work, especially if you are very confident in your initiative or planning to sell your business. Say you are in position to sell your company for $110 million. If you had given away 10% of your company, you would have missed out on $11 million at the time of the sale. You wouldn’t lose anywhere near as much, however, if you had taken out a $2 million loan with terms of two years or so.
Terry Blum, director of the Institute for Leadership & Entrepreneurship at Georgia Tech, wrote in 2014 that equity financing is a wise choice “If you want a small piece of a big pie.”
EXTRA CASH CANNOT COMPENSATE FOR EXPERIENCE
Finally, it’s important to consider how such a huge budget could effect spending discipline. Working with a limited budget teaches business owners how to make a little money go a long way and only make investments that have been carefully analyzed to determine strong returns. Distributing a massive budget to a relatively young business, on the other hand, could result in careless spending. Large budgets curb patience, prompting business owners to hire too quickly and pursue unexamined investments. Even if these efforts have positive outcomes, the business owner has not acquired the financial wariness necessary for growing his or her business after the investor is out of the picture.
A small business loan will grant you this wariness in addition to an unparalleled knowledge of your industry. Applying for a loan requires you to conduct extensive research on your business’s financial health and how your industry has evolved as of late. You must also compile financial documents such as a profit and loss statement, balance sheet, and cash flow statement. This research and paperwork will tell you how much money to ask for and give your lender the impression that you take your work seriously and can handle debt.
THE ENDLESS VALUE OF KNOWLEDGE
The best business owners know their industry better than anyone in the world, and applying for a loan will put you among their ranks. You’ll be able to make sound business decisions, maintain firmer control over your finances and never suffer the consequences of a failed investment.
This is a reward that no amount of capital can match. Business can survive without equity financing but paying off a small business loan might as well be a rite of passage for expansion. This option is much more beneficial in the long-run, and if you choose an alternative business financing company like United Capital Source, you will have formed a partnership with a financial expert who is waiting for your call about any sort of business advice as well as another loan.