Almost every business reaches a point when extra cash is needed to get to the next level. A manufacturer needs $15,000 to purchase the raw materials for a big order that will bring in $30,000. Or a start-up needs funds to get off the ground. Is it better to go into debt or to offer equity in your business in exchange for the needed funds? The answer depends on your situation.
A big advantage to borrowing is that once the loan is paid off, the obligation is over. The total cash outlay for interest and principal payments is generally known. And the interest is deductible as a business expense. Successful repayment of a loan will help the business’ credit rating for future financing. But for short-term loans, the actual interest rate may be very high when expressed as an annual percentage rate. Lenders may tuck all sorts of hidden fees into the loan, reducing the actual amount received. If you’re already strapped for cash, repayment may be a challenge. Take on too much debt, and your business could face foreclosure or have difficulty attracting future investors. And for a new business, securing a bank loan may be nearly impossible.
If you grant an equity position in your business in exchange for funds, that piece of your business is forever out of your hands. A start-up may have an easier time raising equity than getting a bank loan, although finding the right investor can take time and effort. Investors may demand a say in how your business is run in exchange for the cash they put in. This can be a good thing – some investors have terrific ideas for improving your business, or may lend their special expertise to help the enterprise succeed. And with no interest or loan repayments, and without hidden loan fees, you may have more cash to use in your business. Contact our office today and we’ll help you determine the best options for your business.