The majority of businesses main goals will be to expand and grow with hope of retrieving more market share. Businesses who want to grow will need financing in place as growth can be very costly. There are two common methods which a business may want to finance the growth; Equity is one method, in the form of an investor or and the other method been debt, in the form of borrowings such as a bank loan. Below you will see the advantages and disadvantages of each method;
Equity Advantages
Choosing equity to finance the expansion for growth in a business is less risky than taking out a loan because you don't have to pay it back, and it is a good option if the business can't afford to take on debt but still wants to see expansion. Another advantage of equity is you enter into the investor's network which will add more credibility to the business. Getting investors involved in financing the growth of the business is beneficial as investors take a long-term view, and most don't expect a return on their investment immediately, Investors would rather see their funds put to good use by the business which should hopefully develop long term financial gains. With equity the business won't have to channel profits into loan repayment. There are no requirement to pay back the investment if the business fails the investor should know the risks involved before contributing funds into certain investment opportunities. Overall from choosing equity you will get the money you require to help aid in expansion and growth of the business.
Equity Disadvantages
Although there are some very good advantages for taking up equity to fund business growth there is also however some major disadvantages from choosing this method, such as equity may require returns that could be more that the rate you pay for a bank loan thus making it more expensive option. It is up to shareholders when they would like to see returns. Another disadvantage is when an investor invests within a company they require a certain amount of ownership and with a percentage of profits. A business will not want to give up this kind of control. Equity funded businesses can make decision process longer as and major decisions should be consulted with investors to make sure it abides by their interests and if does not this may cause disagreements thus making decision making process much longer. Also finding the right investor for the company can take a lot of time and effort if the business is performing poor and looks less attractive on the financial statements this will put investors off from investing within the business making the process very long to raise the capital the business needs for expansion.
Debt advantages
The advantages of using debt to finance growth of a business are the bank which the company retrieves the bank loan from has no say in the way the business should be run and does not take any ownership of the business. The relationship between the bank and the business will end once all the repayments of the loan have been made. The business will pay interest on the loan but this is tax deductible. Depending on the plans for growth the loans can be agreed to be short term or long term. The business is not required to hold meetings with shareholders and does not have to seek votes before taking certain actions which makes the decision making process quick and can quickly react to the market needs.
Debt Disadvantages
Some good advantages given in the above paragraph but debt funding of business growth has major disadvantages; such as the money borrowed must be paid back within a fixed amount of time. Also relying too much on debt when the business has cash flow troubles, can put the company at risk of unable to pay back the borrowed money. Carrying too much debt will be reflected on the company's financial statements and will put off potential investors and they will consider the company to be "high risk", which will limit the business ability to raise capital by equity financing, if the business also wishes to use this method as well. Debt financing will leave the business vulnerable during hard times if sales fall. Choosing debt to fund business growth can actually make it very difficult for the business to grow because of the high costs of repaying the borrowed money. If the borrowed money is not repaid within the agreed time, assets can be held as collateral to the lender and the owner of the business is often required to personally guarantee repayment of borrowings.
Conclusion
From the above arguments for both advantages and disadvantages for equity financing and debt financing of business growth i don't believe that one method is better at raising capital than the other. Often in businesses they will use both equity and debt financing to meet the business needs when expanding. The two forms of financing together can work very well to reduce the downsides of each method. The right method or how much financing you seek from each method when using both will depend on the type of business, market the business operates in, cash flow, profits and the amount of money the business wises to seek to help grow the business. I would advise a business who seeks growth to use both equity financing and debt financing to reduce the drawbacks of each method and neither way is better than the other at getting access to more capital.
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