Debt and Equity Financing Boosts Small Businesses

For many companies raising resources is of utmost importance in ensuring survival in a harshly competitive environment. Credit restrictions have become tighter and banks are not as forthcoming with loans and financial assistance. Even venture capital firms have been affected by recession thereby drying up the funds even more. Debt and equity financing are still the best options for companies to raise funds needed for rapid expansion and diversification.

Raising resources through loans

An individual takes credit card advances, home loans and education loans to meet his personal needs, and banks and financial institutions that extend such assistance demand payment of interest along with the principal as quid pro quo. In the same way, as the owner of a business enterprise you need to approach banks, family and friends for financial help with the promise that you will repay the principal loan along with interest at the best rates possible.

Taking a loan has many advantages, the lender doesn’t get a stake in your business and doesn’t interfere with your day to day decisions and company operations, the relationship is restricted to lender borrower terms and once the loan is liquidated the relationship ends right there; the loan can be repaid in small installments from the profits of the business.

The disadvantages of loans become apparent when you default loan installments, and the lender repossess company assets or your personal property to recover the dues. If the business suffers the debts could take you down or at least create a big hole in your asset base rendering recovery difficult. You can eliminate many of these risks by availing concessional finance under the US Small Business Administration’s (SBA) packages for small business and small industries.

Raising resources through equity

In equity financing you offer your shares or stock to outside investors that gain a stake in your business. You actually woo investors by convincing them that you are a growing company that can stimulate rapid growth and distribute increasing profits among the stock holders. Unlike a loan you don’t have to repay the amounts invested by shareholders. More important, the investor shares the burden of risk and views his investment as a long term funding that matures slowly.

The disadvantage is that stock holders acquire a controlling interest in your company and you cannot make any big policy changes without consulting them, and you can’t avoid or remove shareholders, you need to buy them out offering prices that will be substantially higher than the original investment.

Of the two, which is better?

Just like banks, investors are becoming choosier about financing start-ups that involve greater risk. Venture capitalists are less likely to step in unless the company shows potential to go global. Investors bringing in more than $300,000 will demand a 50% stake where you can’t make crucial decisions without having the partner breathing down your neck. All said and done, if you are a sole proprietorship firm raising capital through family and friends, and your company services the local market and meets a localized service or manufacturing demand you will be better off financing through banks or the US SBA. If the company size and volume of operations is too high, a mix of debt and equity should see you through.

How can a loan for vehicle title help?

Small business entrepreneurs have a new friend in town and that happens to be the cash loan for title. The car equity loan rests on the car acting as collateral for the loan. The auto equity loan will help the businessman raise more than 60% of the value of his vehicle, money that will be very useful in strengthening the company assets.  The pawn car title loan interest rates are usually below 25% APR which represent reasonably low cost finance for small businesses, if you consider the utter absence of background credit checks. Pink slip loan repayments will also not strain company cash flows.

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