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Expert Answers to Biz Questions

Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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The Biz Question

Financing your business - What are the options you have?

If you are planning to start your own business or if you are planning to expand it, you need to have enough money in hand, so that you can succeed in your venture. Though there is the option for you to use your personal savings for the business purposes, it would be wise of you to avoid doing that and keep your savings safe and secure. There are various other sources from where you can get the money required, in order to expand or even start a business. There are various business financing options, and the two main are debt financing and equity financing. However, just as you are required to get help of a credit counseling agency in order to decide which would be the best option for you to pay down the debts and improve your credit, it is important for you to get business financing advice too.

Business financing options

There are two main financing options, through which you may be able to get the required money to start or expand a business. One is debt financing and the other is equity financing.

Debt financing

Debt financing is mainly about borrowing money for starting a business and expanding it too. Therefore, it is mainly concerned with borrowing money from any of the outside sources, where you are required to promise that you are going to return the principal amount, along with making the payments on the agreed upon interest rate. Debt financing can lead to even more debts, and as you would be required to make the interest payments too, this may not seem to be that good an option. However in case of financing, debt is considered as the "leverage." The common and popular most source of debt financing is the financial institution like that of the bank. However, you can borrow from other private companies too or may be a family member or friend.

There are various advantages of debt financing and these are:

  1. There are the tax deduction options and this is because, the interest payments along with the principal payments on the business loan are considered to be the business expenses, and therefore are deductible from the income taxes payable with regards to your business.
  2. When you are borrowing form a bank or any person, you are agreeing to pay back the money along with interest. Therefore, the institution or the person cannot claim to be the owner of your business.

However, the main disadvantage of debt financing is that it leads you to incurring business debts. If you fail to mange it properly, you can end up hurting your prospects.

Equity financing

Equity financing is the option through which an entrepreneur or a business tries to obtain funds by the issuance of a common or the preferred stock. Funds can be received in various forms and these can be in the form of cash, or different other services, or even in the form of properties. This means that you are actually selling off interest of the company though partially, to the people investing into it.

The greatest advantage of equity financing is that you aren't required to borrow any money from the person. This means, you aren't even required to pay back any money or any form of interest to the person investing in your company or your business. However, on the other hand, the main disadvantage of equity financing is that it may not always be possible for you to try out the equity financing option, as very few investors would be interested in your company at such an early stage.

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