How is Business Loan Different from Equity Financing?

business loan vs. equity financing

Every business needs some extra capital and one can look for an investor or borrow funds from bank/NBFC. It is important to judge the pros and cons of different financing channels before choosing one. There are two ways for business funding, Debt by business loan or Equity. Let us look at both of these and find out which one is better.

Debt Financing

Debt financing is where a person borrows money from the lender and he/she has to repay it back with interest. When you take a loan, you finance something with debt.

The Advantages

  • There are certain restrictions on debt financing, but it allows you to control how that extra capital is spent on your finances.
  • When you take a loan for business, it won’t cause a long lasting effect on your company other than loan payments.
  • Debt financing itself sports various categories and for different businesses, it has different kinds of terms and conditions, so one can have a flexible variety of funding choices.

The Disadvantages

  • A business loan is given on the basis of your financial state and credit history thus; one may not even qualify this type of economic support.
  • Your business will be seized by the lender if you fail to repay the loan.

Equity Financing

It is the process where you trade your business ownership to some venture capitalists or angel investors and in return, they provide you with capital. It is important for certain startups and businesses with global aspirations.

The Advantages

  • There is no need to pay interest on the capital raised or risk the company’s profit for loan payments.
  • Finding the right investors can give you experience points and industry connections.
  • You do not have to repay the investment if the business fails.

The Disadvantages

  • It is a long process compared to debt financing.
  • It requires good decision making power as you are giving away your business ownership. Things can go awry due to any disagreement and you might have to cash out your own business.

Which one is right for you? Let’s find out

  1. How soon you need it?

Debt financing through unsecured business loan is a better option to go with if you want instant cash. Just apply for the loan at and get funds in two days or less. The process is incredibly fast and sometimes takes just an hour. Whereas, equity financing requires finding the right investors, which is a time consuming process.

  1. How much you need?

If you are running a small-scaled company and have a small need for funds, then debt financing is a better choice. Equity financing rarely comes in small amounts and thus, is not a feasible choice for every entrepreneur or organization.

  1. How about sharing your business?

If you do not want to lose control over your company, then equity financing is the better option. Otherwise, go for debt financing. Just make sure you repay the loan in time so that you do not risk losing your company to the lenders.

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