To venture into a successful business, you must continuously fuel your assets for growth and profitability. While bootstrapping is widely considered a secured start, it often becomes necessary to seek additional funding. Two primary financing options stand out to accord business expansion: business loans and equity financing. The blog will provide detailed possibilities, helping you determine the best fit for your business needs.
Understanding Business Loans
A debt financing method involves business loans. This means getting funds from organizations in the finance sector, such as banks and Non-Banking Financial Companies (NBFCs). Security in business loans is either guaranteed or not guaranteed in different cases. The lending institution requires collateral in guaranteed loans, such as business loans secured by real estate or any other financial assets. In contrast, unsecured business loans are granted based on creditworthiness and business performance, often up to a specific limit.
The advantage of a business loan is that you retain complete control over your business. You remain the sole decision-maker without obligation to share equity or management rights with lenders.
Exploring Equity Financing
Instead of debt, equity financing gives out a few ownership shares in a company in return for money. This money can come from venture capitalists, angel investors, or private equity firms. Unlike loans, equity financing does not have to be paid back directly as interest rates reduce over time through company growth to virtual zero levels if necessary. Nevertheless, equity financiers assume some influence and discretion over how one’s company operates. The success of your business leads to higher investment returns for them but also makes them vulnerable to losses should they perform poorly.
Business Loan vs. Equity Financing: Which Suits Your Business?
- Timeframe for Funding: For Business loans, the emergence of online applications has made it easier to secure loans, but obtaining equity financing may take more time due to long negotiations and prospecting for suitable investors.
- Asset Security: In case of default, business loans might put your assets at risk, as they may need some collateral. Equity financing is not based on any demands of collateral, thus making it a possible way out for businesses that don’t have many assets.
- Liability and Repayment: When you obtain a business loan, you must repay the amount borrowed plus interest. Otherwise, you might face financial troubles or even lose your property. On the other hand, equity financing does not require repayments from companies that issue shares; however, low productivity levels may force owners to involve investors in their business decisions if things go wrong.
- Ownership and Control: Debt financing allows you to control your business altogether. Equity financing, however, means sharing business decisions and profits with your investors.
- Business Expertise and Networking: Equity investors may provide valuable insights, connections, and expertise that could help you expand your business. In comparison, lenders only offer financial support without any other advice on business steps.
Conclusion: Making an Informed Choice
Each financing option has pros and cons. Your decisions should be consistent with your company’s present requirements and future ambitions and your comfort level with giving up some control over the decisions made on its behalf.
If you are considering applying for a business loan of up to INR 75 lakhs*, consider Ruloans. We offer flexible tenures* and low interest rates. We also provide secured loan products, including loans against property and securities. Apply now or visit any of our branches for further clarification.
