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Equity financing takes longer due to the negotiating process regarding the investment package.
The potential long-term value of the business is evaluated between the principal owners and the investor in relation to the percentage amount staked for funding.
It typically takes around eight weeks for an equity release to complete and for your business to receive the agreed-upon funds. Some applications completed in as little as three weeks, though complicated negotiations can take many months.
For debt financing however, the turnaround, whilst involving scrutiny, is a lot quicker and is flexible with short or long-term loans.
The key difference between them is that with debt financing you are prioritizing maintaining ownership of your company and agreeing to hard full-stop deadlines that need to be met. Whereas with equity financing you are accepting a potentially longer period of time to find the right shareholder, but with there being no hard deadlines to be met in so far as loan repayment is concerned.
For small and start-up businesses qualifying for a loan that is competitive can be difficult and often require the guidance of a credit broker.
Investors look to a firm's credit score, how much time the company has been in business, how strong the business's financials are, and what collateral the business can offer.
Because of this scrutiny some businesses will be more likely to choose equity financing simply because they’re unable to qualify for debt financing at a competitive rate that works for their business goals.
It’s natural for businesses to want to avoid debt, Equity Financing is a method of gaining working capital that helps to do so.
Equity Financing may involve less risk because there is valuable collateral at stake and a loan to be repaid. It can burden a business's cash flow needing to make regular payments on a loan, hindering a company's growth.
A young business may not know what level of income that can be relied upon in a given period. This may make equity financing necessary if the business can't qualify for a loan that is also a fair non-predatory valuation. The greater the debt financed loan, the greater the uncertainty the company over paying it back.
Securing the working capital your business needs is undertaken with the expectation your business will become or will continue to be profitable in the long term. Taking out a loan and repaying it on time will build your business credit score sooner rather than later and will lead to better rates and returns.
It’s worth considering how much on-going scrutiny you’re comfortable with.
With Debt Financing, you would be planning to use debt to increase your business's earning capacity. With Debt Financing, you'll be aware of how much you will need to repay the lender; the principle plus the interest for the term of the loan.
However, with Equity Finance, parting with a percentage of your company can be a blessing, or a curse, depending on who you are partnering with. There is no end in sight, more things are left to chance and shareholders need to be consulted with regularly. The more shareholders the greater amount of scrutiny will be placed on the principal shareholders of the company.
Equity finance doesn't carry with it the burden of paying back a loan. It does however affect long-term profit sharing; maintaining as much control of the company as possible is a concern for principal owners.
Because equity financing involves drawing in reputable investors it can be a great opportunity to work with individuals with industry knowledge or experience.
We take the time to understand your business and its needs in order to find the finance product that is best for your situation.
We’ll help you stay away from a time-consuming, inflexible finance arrangement that hinders rather than helps your business grow and succeed.
We’ll be with you every step of the way bringing our expertise and trust in the industry to make the funding process as easy as we can.
As a founder of multiple businesses, Jamie believes that mindset, discipline and ambition are key drivers for success, both for his businesses and for his clients.
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