A lot of startup businesses get their financing from two different types namely debt and equity financing. While debt financing is commonly used by a lot of small and startup businesses, there are still some companies who use equity financing. Although in some cases, these two can be used in combination to finance a company.

Debt and equity financing are vastly different when it comes to sources and benefits. For one, debt financing can be acquired from financial institutions such as banks SBA loans. This type of financing allows businesses to borrow money and settle the payment with the agreed time frame, along with an interest rate. Companies can use different tools such as credit lines and bank loans to acquire debt financing. For instance, bank loans can be used to finance long-term business operations and credit lines can be used for short-term needs.

Debt financing allows small companies to expand their business while addressing their short-term operating needs. Debt financing also allows companies to keep their business ownership, provided that they pay the loan granted upon them. This type of financing also deducts the company’s income taxes since the interest rate and principal rate classified as business expenses.

Equity financing, on the other hand, can be acquired from private investors such as peers and sophisticated venture capitalists. For family businesses with ex-im bank, some get their financing from friends and families, lessening the hassle or legal expenses. Some also approach venture capitalists and angel investors for a high-net worth of funding.

One of the main benefits of equity financing is the lack of interest rate the company needs to repay and it can be acquired in large sums if there is a need to make bigger expansions such as export credit insurance. Aside from those, companies are also open to several business and networking opportunities which may likely increase the company’s profits. Getting connections from private investors also increases the company’s credibility in the industry.

Although these two types of financing have several benefits, they also have a few risks. For instance, debt financing can have high interest rates, depending on the macroeconomic conditions and the company’s needs. Companies funded through equity financing must have fast growth in their business and export credit insurance in order to repay their investor. The important part in choosing a financing option is being careful to avoid complications that might affect the company.