When it comes to small business funding there are a lot of options to choose from. Luckily, all of your funding options can be boiled down to one of two categories: debt financing or equity financing. This guide covers everything you need to know about debt and equity financing, including the advantages and disadvantages of each.
What is debt financing?
With debt financing, a borrower receives upfront funding from a lender and is obligated to repay the full amount (the “principal”) plus interest over a period of time, as specified in the agreed-upon terms.
What is equity financing
Equity financing is the process of raising capital by selling partial ownership of your company. Instead of paying back the principal of the loan plus interest, business owners trade a percentage of their company in return for funding. Lenders are then paid back with a portion of future profits.
What’s the difference between debt and equity financing?
The biggest difference between debt and equity financing is that debt financing doesn’t require you to give up a part of your business ownership. You’re simply borrowing capital from an outside source, just as you would be given outside financing for a mortgage or a car loan.