Debt and equity financing is important because any business, big, small, or startup can end up needing extra capital. Capital is what makes a business run. A constant flow of capital in and out of your business is what makes it all work.
For your business to be successful you need more coming in than going out. Generally, it is all very simple, but if you’ve owned or operated a business you know the challenges and opportunities are in the details.
Most successful businesses understand how to leverage and get the most from equity and debt financing. Having a solid understanding of the difference between debt and equity financing, and how and when to use each can shoot you past your competition and set you on the road to financial success and stability.
Debt and equity
Before going any further, let’s define these two key terms to make sure we are on the same page.
Let’s first talk about debt, most everyone is familiar with personal debt. When we talk about the business debt it is not conceptually different, just different in respect to types of loans, responsibility for repayment, and ways that funds can be used.
The main difference between business and personal debt is who is actually responsible for the repayment of loans. If the business is on solid footing financially it is very likely that you can get a loan and only the business is responsible for paying off the debt. This removes you, the owner, from personal responsibility.