Home >> Access to Capital >> Getting Started >> Understand Your Options

Understand Your Options

There are two basic types of financing available for entrepreneurs looking to start or grow their business: debt and equity. Deciding which type of financing will work best for you and your business can be a challenge and it will depend on a variety of factors. That’s why we’ve provided a closer look at the differences between debt and equity financing below.

Debt Financing

Money you pay back, usually with interest, over a set time period with specific terms (examples: Bank loans, credit cards)

Pros

  • Wide range of options
  • Easier to obtain than equity financing
  • Retain control and ownership of business
  • Interest paid is tax-deductible

Cons

  • Collateral, personal guarantee often required
  • Repayment required regardless of how business is doing
  • Funds spent paying down debt

Equity financing

Involves giving up a portion of the business in exchange for money from equity investors; investors become part-owners in the company (venture capitalists, angel investors) 

Pros

  • Intellectual capital – Investors can provide expertise, experience and key contacts
  • No obligation to repay if business loses money or fails
  • Flexible use of funds without burden of paying down debt

Cons

  • Forfeit sole ownership and control of business and profits
  • Time consuming; Difficult to find
  • Actions must reflect interests of investors