Opinion – How to Decide Between Equity Financing and Debt Financing

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The CEO of the Development Bank of Namibia (DBN), Martin Inkumbi, once said that a solution can be found in equity financing for the recovery. To understand this, I will elaborate in more detail on equity and debt financing. When it comes to equity and debt financing, there is a fine line between balancing risk and profitability in order to maintain the value of your business over the long term.

In most cases, after weighing the equity and debt issues, most companies go for debt if they can get it. Debt is relatively inexpensive in comparison, and equity can introduce a whole new paradigm in business management. Instead, weigh fairness against your own long-term goals, your ability to grow the business, and the potential it offers.

There are many ways to alleviate a cash flow crisis or help your business in times of crisis. Consider the merits of equity and debt when making your choice. Equity financing involves selling a portion of the company’s equity in exchange for capital such as private investors, venture capitalists, friends and family, personal savings, among others. Debt financing involves borrowing money from a lender, in most cases a loan from the bank.

This money is paid back over time, including any additional fees or interest. Before making any financial decisions, always be sure to do your due diligence and consider all available options. Ultimately, you put your business in the hands of other people. And these people also play a role in the outcome of your business decisions. So think carefully when choosing equity / debt financing to raise capital for your business.

Most businesses use a combination of equity and debt financing, but equity financing has some distinct advantages over debt financing. The main one is that equity financing comes with no repayment obligation and provides additional working capital that can be used to grow your business.

Companies usually have the choice of seeking equity or debt financing. The choice often depends on the most easily accessible source of financing for your business, its cash flow, and how important control of the business is to its primary owners. The debt-to-equity ratio shows how much of a company’s financing is provided proportionately by equity and debt.

In addition, equity financing does not impose any additional financial burden on the company. But that doesn’t mean there is no downside to equity financing. In fact, the downside is quite significant. In order to get financing, you will need to give the investor a percentage of your business. You will need to share your profits and consult with your new partners whenever you make decisions that affect the business.

The only way to weed out investors is to buy them back, but it will likely cost more than the money they originally gave you. The right choice depends on your short and long term financial goals and your personal preferences. Debt financing is the best choice when you prefer to be in control of your operation and don’t mind the trade-off between increased risk and higher income potential. However, if you prefer to share the risk, mitigate the debt, and bring in top-level experts, invite equity investors.

The information I share with you as an entrepreneur is intended to help you make informed decisions. My goal is to see Namibian companies move from the status of SMEs to that of companies to develop the economy of our country. Therefore, I will continue to share valuable information that will have a positive impact on your business. If you accept some loss of control for equity investors, you can gain significant expertise. Some entrepreneurs turn to equity investors as much for their expertise, industry knowledge and name credibility as for their money. A valued expert who has the money at stake can become a huge asset in the growth of your business. A lender will leave you alone, but you don’t get any professional expertise with the financing. The effects of debt on the cost of equity do not mean that it should be avoided.

Debt financing is generally less expensive than equity because interest payments are deductible from a company’s taxable income, while dividend payments are not. Plus, debt can be refinanced if rates drop and eventually paid off. Once issued, the shares represent the perpetual obligation of dividends and a dilution of control of the company. Investors often view risk-taking companies as dynamic and with the potential for growth.

They realize that in order to get higher returns, they will have to invest in riskier companies. If a business is wise about its debt ratio and how it uses its increased profits, going into debt can make the business more attractive to investors. If you’re not comfortable with the idea of ​​handing over part of your business to an outside investor, equity financing is probably not for you. If you have a good credit rating, you can get a low interest rate on your loan or avoid having to post collateral, which can save you a substantial amount of the overall cost of the loan.

In conclusion, both equity financing and debt financing can be useful for your business. Once you have assessed your long-term business strategy, you will be able to decide which loan option will help you achieve your goals.

* The opinions expressed in the article are the sole responsibility of the author and are in no way related to his employer or affiliates.

2021-10-04 Journalist

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