Kavan Choksi – Should Small Businesses Choose Equity or Debt Finance Funding?
Small business owners have to apply for funds, which holds true for companies that have just entered the market now. Funds available to small business owners are of two types: equity and debt financing. If you are a business owner, you often ask yourself this question- which one of these is the best for you?
Kavan Choksi – Know the meaning of equity finance and debt finance
Kavan Choksi is an esteemed entrepreneur who is a skilled expert in finance and business matters. In his opinion, debt financing is the same as a credit card for purchasing a car or a home. You need to apply for the loan and make a pledge to pay it back with interest. This is the same principle that debt financing holds when it comes to your business.
As a small business owner, you can borrow this loan from your bank or request family and friends to give it to you. You also have the option to ask other lenders for any personal loan in your name. However, you need to give back this loan. Even if you are taking a loan from any family member, as per the rules, they must charge you with the minimum rate of interest under IRS for you to avoid the legal gift tax.
What are the benefits of debt financing?
When it comes to the advantages of debt financing, you will find it has some advantages. The first is the lender gets no control over your business, and when the loan is returned to the lender, your relationship ends. The second benefit is the interest you need to pay tax-deductible, and the last advantage is you are able to forecast all the expenses as payments for your loan will not change.
The disadvantage of this kind of finance is your business needs to pay back this debt in the future.
Equity finance for your business
This sort of finance refers to the investor participation where you can offer shares to the public from the company. This finance entails the entry of angel investors and venture capitalists. Here, your idea needs to be presented to a group of investors that give you equity finance. Here you will get the benefits of more cash, as you do not have to pay loans. Finally, since these investors have experience with business, they can guide you on its development.
However, there is a downside as well. Every time you make a decision about the company, you need to consult them, and if you wish to remove them, you need to buy them out. In short, this is an expensive choice for you.
In the opinion of Kavan Choksi, as a business owner, you need to consider both of these options well before you make your choice. However, if you are a new business, it will be hard for you to secure equity finance, and in such a case, you should opt for debt finance instead.
