Start My Business: Taking Loans vs. Trading Equity

Business Foundation

Business Foundation is the key to every economy. Most big corporations nowadays started out as mom and pop stores or small businesses. For instance, companies like Apple, Dell, Nordstrom, Whole Foods Market, or Walmart started next to nothing.

As most of the businesses will fail within its first 3 years of operations, the few ones managed to grow and become larger companies. To expand their businesses, the owners have two basic options: borrowing money from banks or selling business equity (or ownership) to investors. There are both pros and cons of using these 2 ways. This article will cover the pros and cons of these 2 basic financial options.

 

Business Foundation
Business Foundation

Borrowing Money from Banks vs. Selling Business Equity

While borrowing money from the bank seems to be a good option, it also contains a lot of risks and disadvantages. First, let’s look at the advantages from borrowing money from the bank as compared to selling business equity:

  • The owners of the expanding businesses do not have to give up their ownership to acquire more cash for their businesses. In other words, they do not have to share the future profits with the lenders. Also, the company owners do not have to
  • The owners have the control over its forecasted principal and interest obligations
  • Interests on the loans are tax deductible, which lowers the actual debt cost to the company.
  • The owners do not have to comply with state and federal laws and regulation regarding securities.

Second, let’s focus on the disadvantages of borrowing money from bank as compared to selling business equity.

  • By using equity, the owners do not have to repay their companies’ debts. Therefore, their overall business fixed costs will be reduced by the cost of borrowing loans
  • Both lenders and investors consider companies with higher debt-equity ratio riskier.

Conclusion

Depending on the owners’ prediction of their businesses’ future success, the owners can carefully select between borrowing money from banks or selling their equity.

 

Here are my other posts on how to build the cash flow:

What is a VA Loan and how are you eligible for the VA Loan? 

How do I get approved for a home mortgage? 

How to Increase Revenue 2X for Your Beauty Salon?

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