Though we’ve written on both topics—small business loans extensively—we’ve never put small business loans and equity head to head for small business owners to compare which might better suit their needs. While equity is often referred as the more prestigious form of startup or growing capital, small business loans have certain strengths that might better appeal to some small business owners.
First off, Entrepreneur defines equity financing as, “a method of financing in which a company issues shares of its stock and receives money in return.” This model has effectively grown many businesses and allows small business owners to use their cash flow to finance other areas of business without having to worry about repaying debt. But the more money you raise, the more you sacrifice in ownership of your company, which is one of the major concerns business owners have.
On the other hand, small business loans require business owners to repay a debt plus interest upon qualifying for a loan. On paper, this stands out as the lesser option, but there are certain perks to incurring debt over equity. For one, the debt repayment process on small business loans ends, whereas investors may keep a stake in your company indefinitely. While it is important to consider that certain lenders might require higher interest rates, having equity investors with a large minority stake in your company could have an equally significant effect.
Other factors that should be taken into consideration when trying to obtain capital:
- How much money you need. Incurring too much debt can be risky, especially when operating a startup or young business with little cash flow history.
- Outsider opinions. Equity investors often place individuals on your board of directors or insist on inserting their influence elsewhere. Make sure to analyze all the clauses and stipulations in an equity agreement to determine whether this will disrupt your creativity and desired trajectory.
Because each small business is different and has different capital needs, taking your unique situation into account rather than taking a one-size-fits-all approach to lending is crucial. Assess your capital needs responsibly and only ask for the necessary amount, because as all small business owners know, money isn’t free.