It can take a long time to explore the many financing options for your business. Whether you are starting a business or want to take the next step and grow your business, you have the choice between debt and equity financing.
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Here are some important considerations to make when deciding whether debt or equity financing is right for you.
How much do you have to borrow?
The first thing you need to know is how much money you need. There are several ways to find out:
When starting a business – add up the start-up costs such as rent, furnishings, store equipment, inventory, salaries and perks (including yours), legal and accounting costs.
If you are buying a property, ask for a copy of the contract with the purchase price.
When borrowing for cash flow purposes, use cash flow forecasts to identify bottlenecks. CommBank’s financial plan template includes a cash flow template that you can use for this purpose.
By comparing this amount to the money available, you can estimate how much money you may need to borrow. To reduce your financial stress, if it seems like you may need to borrow more, consider ideas that could save you more money or, if you can, continue working at your current job to get extra to generate income.
Another option might be to apply for federal grants for some new businesses.
Debt financing is borrowed money that you pay back with interest on an agreed date. The most common are:
equipment leasing and hire purchase.
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Benefits of leverage
You control your business and wealth because you are not liable to investors
You are not required to share company profits
Some fees and charges on a business loan may be tax deductible: your accountant can advise you on this.
Debt Financing Considerations
New businesses may have difficulty obtaining debt financing without accurate financial records or forecasts and a comprehensive business plan
You must generate sufficient cash to meet repayments, fees and interest
Regular repayments can affect your cash flow . Start-up companies often face liquidity problems, which can make it difficult to make regular payments.
If you use an item as collateral to secure a loan, the item can be taken back if you are unable to make repayments.
Equity Funding invests your own money or someone else’s money in your business. The main difference between debt and equity financing is that the investor becomes a co-owner of the company and shares in the profits that the company brings.