ll archives: Understanding Debt vs Equity Financing
Even if you don’t know exactly what “equity financing” and “debt financing” mean, chances are you’ve heard the terminology thrown around here and there in conversation. Both forms of small business financing are viable options to help you grow your business. Equity financing is money from investors. It involves taking capital from a 3rd-party investor — friends and family, angel investor, venture capital, private equity — who buys a percentage of your business. You get the capital immediately, and the investor gets a share in the profits later on — if your business succeeds. If you’re looking for funding to start a new business, equity financing could be your best (and maybe you’re only) option. Some examples of female-owned businesses that have taken the equity route include LOLA , theSkimm and Parachute.
Debt financing involves borrowing money from a lender. Similar to equity financing, you receive upfront capital. You’re expected to pay back the amount you borrowed at some point in the future — and this is outlined in a clearly specified repayment plan. Some examples of female-owned businesses that have opted for debt financing instead of equity financing include Hackwith Design House, Knot & Bow and Bec Brittain.
Depending on your business’ type, growth stage, and needs, the following types of debt financing are available:
- Lines of credit for short-term flexibility
- Small business credit cards for small fluctuations in expenses
- Merchant cash advance (MCA) for short-term working capital
- Invoice financing for smoother cash flow
- Term loans for growth investments
Next week, we’ll jump into the nitty gritty of a term loan, and why this form of financing might be the best fit for your small business.
Bonus: A side-by-side comparison of debt and equity.
Samantha Novick is the Social Media Manager at Bond Street — a company focused on making small business loans simple, transparent and fair. Check in next week for a new video on how you — as a creative entrepreneur — can take advantage of small business loans to grow your business.
Photography: Kelley Raye