Advantages vs. Disadvantages of Equity Financing
- Less burden. With equity financing, there is no loan to repay., The business doesn’t have to make a monthly loan payment which can be particularly important if the business doesn’t initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business.
- Credit issues gone. If you lack creditworthiness—through a poor credit history or lack of a financial track record—equity can be preferable or more suitable than debt financing.
- Learn and gain from partners. With equity financing, you might form informal partnerships with more knowledgeable or experienced individuals. Some might be well-connected, allowing your business to potentially benefit from their knowledge and their business network.
- Share profit. Your investors will expect—and deserve—a piece of your profits. However, it could be a worthwhile trade-off if you are benefiting from the value they bring as financial backers and/or their business acumen and experience.
- Loss of control. The price to pay for equity financing and all of its potential advantages is that you need to share control of the company.
- Potential conflict. Sharing ownership and having to work with others could lead to some tension and even conflict if there are differences in vision, management style and ways of running the business. It can be an issue to consider carefully.
- If your creditworthiness is an issue, this could be a better option.
- If you’re more of an independent solo operator, you might be better off with a loan and not have to share decision-making and control.
- Would you rather share ownership/equity than have to repay a bank loan?
- Are you comfortable sharing decision making with equity partners?
- If you are confident that the business could generate a healthy profit, you might opt for a loan, rather than have to share profits.