THE RIGHT WAY TO MOVE FORWARD – DEBT FINANCING VS EQUITY FINANCING
INTRODUCTION
There is more than one way to fund a new venture and fuel its growth. For almost all, it is going to require bringing in outside money at some point. Even if that is only to multiply what is working or to create a source of emergency capital. The two primary options are to either leverage venture debt financing or fundraise for equity investors.
Considering the above facts, Hospaccx team participates in the market trends and dynamic regarding debt financing and equity financing. This is macroficial study of Debt Financing vs. Equity Financing if you want to get into more detail you can contact hospaccxconsulting.com
DEBT FINANCING
Debt means you are borrowing. It has to repay in monthly instalments, over a fixed period of time, at a predetermined rate. Though this can vary depending on whether debt is raising from investors, are using lines of credit or working capital loans, or even new hybrid convertible notes.
THE PROS OF DEBT FINANCING
- The biggest and most obvious advantage of using debt versus equity is control and ownership. Get to make all the decisions, and keep all the profits.
- Another big pro is that once paid back the debt your liability is over. With a fluid line of credit one can repay and borrow just what they need at any time, and will never pay more interest than needed to. Looking at the big picture, using debt can ultimately be far cheaper.
- One major benefit that is frequently overlooked is that business debt can also create more tax deductions. This may not have a big impact at the seed stage, but can make a huge difference in net profits as venture grow and yield positive revenues.
THE CONS OF DEBT FINANCING
- The most significant danger and disadvantage of using debt is that it requires repayment, no matter how well venture is doing, or not. Venture might be burning cash for the first couple of years, with little in the way of net profits, yet still have to make monthly debt service payments. That can be a huge burden on a start-up.
- It is also vital that borrowers understand that financing terms can change over time. Variable interest rates can dramatically change repayment terms later on.
- Too much debt can negatively impact profitability and valuation. Meaning, it can lead to inferior equity raising terms in the future, or prevent it altogether.
Structures used by early stage start-ups such are convertible notes, Simple Agreement for Future Equity (SAFE). These forms of debt eventually convert into equity on a subsequent financing round so it is a good way to bring on board people that are likely to partner with on the long run with the business.
EQUITY FINANCING
This type of funding exchanges incoming capital for ownership rights in your business. This may be in the form of close partnerships, or equity fundraising from angel investors, crowd funding platforms, venture capital firms, and eventually the public in the form of an initial public offering (IPO).
There are no fixed repayments to be made. Instead, the equity investors receive a percentage of the profits, according to their stock. Though there can be hybrid agreements which incorporate royalties, and other benefits to early investors.
THE PROS OF EQUITY FINANCING
- Equity fundraising has the potential to bring in far more cash than debt alone. It not only means the ability to fund a launch and survive, but to scale to full potential.
- Flexibility in distributions is the biggest draw to using equity. If aren’t making a profit, then don’t have any debt service.
- Far more important than the money is that bringing in equity partners means bringing in others with a vested interest in your success. If they have influence, connections and experience, that can make all the difference in becoming the next unicorn success story, versus languishing as a small business for decades.
- Good equity partners can also make it much easier to secure more attractive debt later on.
THE CONS OF EQUITY FINANCING
- The primary fear of giving up equity is loss of control. Partners can mean giving up decision making control.
- A reduced ownership percentage can also not only mean that you have to split the profits, but in some cases, some investors may be entitled to any positive returns before you can get a penny.
- Equity fundraising is the time and effort consuming process. Loan applications and underwriting may not be fun or fast.
CONCLUSION
There are advantages and disadvantages of both debt and equity fundraising. Understand which may be the most beneficial for the current stage of venture and how it could help for future fundraising needs.
Are you planning for healthcare loan or funding for your healthcare organisation? Hospital Loan one of the units of Hospaccx can help you to get funds for your healthcare organisation, below are the healthcare loan services that we offer:-
- Express Loan
- Loan against Property
- Commercial Property Purchase
- Lease Rental Discounting
- Term Loan
- Medical Equipment Finance
- Working Capital Finance
- Project Finance
It is the superficial and macro level study for more details kindly contact Hospaccx Healthcare business consulting Pvt. ltd on hospaccx.india@gmail.com Or you can visit our website on hospaccxconsulting.com
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