Debt versus Equity Financing
Biz2Credit recently attended the TIE conference in Santa Clara, CA. At the entrepreneurial network and showcasing conference, we spoke with a lot of small business owners, most of which were in the tech sector and most of which were chasing Venture Capital funds to raise money for their businesses.
Though equity financing may seem like the ideal way to finance business expansion plans, all small businesses should seriously consider the road more traveled by. Debt financing can be a vying contender, if not a superior alternative to equity financing. Today’s Venture Capital market looks barren next to the funding spree of the late 1990s and early 2000s that gave VC financing its sexy reputation.
That’s not to say taking out a loan doesn’t have substantial drawbacks for a small business. Debt financing during the credit crunch can be challenging, unpredictable and expensive.
So which one is better – debt or equity financing? It’s a decision that most businesses face early in the life cycle of the company, and it’s not easy. We’ve outlined three essential situations where debt financing can provide quick working capital relief.
Years in Operation
Small businesses more than 18 months old should aggressively apply for an SBA-backed line of credit product. Even amid the credit crunch, banks will accept stated income from small business owners and lend to established companies.
Cash Flow
Small businesses with a strong cash flow can easily qualify for accounts receivables financing. Most entrepreneurs assume that factoring is the only debt option available, however, banks will accept accounts receivables for collateral on a line of credit product – a much cheaper and better alternative.
Owner Equity
Some banks even have a credit program that lends against the owner’s equity contribution. Small business owners that have invested a substantial amount of their own funds or have used angel financing should strongly consider this option.
Read on for more information on how to get the appropriate financing for your small business:
