For any startup, raising funds has always been quite tedious and a difficult task. As an entrepreneur, are you in a dilemma which route to take to build the fund for your business? The choice is always between tapping the path of taking a business loan (debt funding) or raising the money through funding (equity financing).
Debt Financing
When a company borrows money to be paid back at a future date with interest, it is known as debt financing. It could be in the form of a secured as well as an unsecured loan. A firm takes up a loan to either finance working capital or an acquisition.
Pros
- A borrower has to repay main along with decided interest at the end of the agreed period which can be either a month, half-yearly or tenure of the full year. You get enough of the time to arrange the parent back.
- Opting this method of funding is quite favourable as you have not to impart with any shares of the company, which is an unambiguous manner means your ownership remains intact.
- Through this mode that you own a flexibility for using the money for almost any and every purpose.
Cons
- Almost repayment has to make every month and defaulter on not repaying the payments can turn out to be a costly financial mistake.
- Defaulters assets can be taken over by the bank and also under new legal procedures, bankruptcy proceedings can also initiate.
- Not maintaining an excellent credit score can make you face a difficult situation for taking funds or even may you have to face a higher rate of interest.
Funding
Funding is the money that you provided with for a particular purpose.
Do you guys sometimes feel, choosing the right source of funding is the greatest challenge we face in today world? Each source, promising in its particular way, has a unique set of advantages and disadvantages. Is it?
Pros
- Funding gives you a much higher chance of securing the money you need — particularly if you don’t fit into the bank’s loan criteria.
- Funding is also less intrusive on the business in general, as you’re not worried about an additional line item on a balance sheet.
- Funding is not a liability on your balance sheet.
Cons
- Risk is higher when one invests without doing proper market research, validation and collecting feedback from outsiders.
- One must be cautious of platform fraud, and ensure every measure should be taken to safeguard the privacy.
The Choice is All Yours
Again, funding and loans both have their strengths and weaknesses, and these criteria highly depend on what you need and by when do you need it. The choice is all yours in the end. Only after weighing all the pros and cons each one of the option you will be able to decide the one that exactly matches your situation and will suit you in every aspect.
