Choosing Between Equity And Business Debt

Written By Ellise Walsh

Fri 3/18/2005 11:26 AM

When you are just starting out in business, taking on business debt can be one of the most frightening decisions you can make. The future of your business, your employees and your family rests on your ability to make sound financial decisions. Make one wrong step, one wrong decision and the business you have worked so hard to build can become bankrupt in no time. Business owners often worry about how they will be able to repay business debt and whether the amount of revenue they bring in during the future will be enough to justify the cost of the business debt. While very few things are certain, it is quite definite that your business will not be able to prosper without necessary cash flow. Sometimes you just cannot save and wait to make the purchases necessary in order for your business to expand. This is even more critical if you are a small business owner.

Other options available to you for raising finance are not always the best solutions either. Many business owners, especially small business owners just starting out, tend to be willing to give up a portion of their business in order to obtain the funds they need to start-up or expand. This is a gamble in many ways. First, you are actually giving up a portion of your business, and any future profits, to raise money in the present. If your business really succeeds, you will still be bound to the agreement.

While taking on a business debt loan can be much more frightening, in terms of securing your future it actually makes more sense. Once a business debt loan is repaid, you own your business, and future profits, outright with no responsibility to anyone else except your self. There is no reason to turn over even a small portion of your business dream in exchange for finance when there are other options available.

Regardless of whether you need a business loan in order to finance the purchase of equipment, rent or purchase real estate or simply have some capital to meet daily expenses until you are up and running, you owe it to yourself to check into a business loan.

You may be surprised to find that there are a number of options available to meet your individual business needs. In addition to various types of loans that make be available to you in order to help you raise the finance you need there are also grants, incubators, factoring and venture capitalists.

In recent years banks have become quite competitive and as a result, interest rates are often lower than ever before. Despite low interest rates, however you should have a full understanding of how a business loan works. It is really quite similar to a mortgage loan.

In exchange for being able to borrow a specified amount of money you will agree to repay the capital at an agreed upon rate at set intervals over a specific course of time. You will also agree to repay the money with interest. That interest rate may be either fixed; meaning that it will not change through the duration of the loan or it may be floating.

Unlike a fixed interest rate business loan, a floating interest rate will fluctuate throughout the course of the loan. This means that you may pay one amount on one payment and quite another on the subsequent payment if the interest rate has changed. A floating interest rate loan can be beneficial in allowing you to access lower interest rates, but you should be aware that there are also drawbacks. You could very well end up paying a much higher interest rate by the end of the loan.

You will also usually be required to put up some form of collateral or asset as a pledge to pay back the amount of money you finance. If you pledge something related to the business, this means that you are unable to pay back the loan and default, you will lose the collateral you pledge.

In order to qualify for a business loan, the bank is normally going to require detailed information about your business including your revenue, profits and expenses. This is where providing a detailed business plan can assist you in obtaining the finance you need.

Banks are usually much more likely to approve a loan when they can see a clear and defined plan for how you intend to make a profit. Plans that are not well thought out or seem lacking are likely to be rejected.