Business loan or equity finance comparison is crucial for the success of your business. When you compare loans, you can actually have a better understanding of what you are getting into and how you can choose a loan option that would suit your requirements best. The key issue to consider in this regard is that business loan is quite different from the equity finance. Although both are financial tools, yet there are differences that make business loan or equity finance comparison important.
An equity finance refers to a line of credit that is provided by a lender to a particular entrepreneur. This line of credit is used only for specific purposes and may be extended or replaced depending on the availability and profitability of the company. The credit line granted to an entrepreneur is not treated as personal property. It would remain the sole ownership of the entrepreneur and in most cases, this line of credit would have to be repaid after the completion of the company's operations.
On the other hand, business loan is not a simple line of credit but a loan taken against your personal assets. Since your assets form a collateral to secure the loan amount, if you fail to repay the money then your assets would become liquidated. If you have equity in your business, then your personal assets would not be liquidated in case you are not able to repay your business loan amount. Hence, a business loan or equity investment analysis would help you understand the difference between these two kinds of loan options.
There are many factors to be considered while comparing business loans vs equity. First and foremost, you need to analyze the viability of your business idea. Is it really worthwhile to build and operate a business? Or, is there some other alternative available such as buying a business or buying shares in a company? Only if you think that your business idea has the potential to earn profits should you seriously consider business loan.
Another factor to be considered while comparing business loan vs equity loan is the cash required. The amount of equity in a business would determine the annual income required. If the amount of equity is less than the amount of business loan, the business would not be viable. However, if the contrary is true, then the business loan is the right choice as it would not only provide a fast source of cash but also give you security.
Once you are sure of the viability of your business, the next thing to compare business loan vs equity financing is the interest rate offered. You would obviously want to avail a business loan that offers the lowest interest rate. This will definitely help you reduce your operational cost while making your business work on a profitable note. While searching for a business loan, it is advisable to check out several lenders as competition in this field is quite fierce.
Many entrepreneurs prefer to have both business loan and equity partners . . . . . . to finance their business ventures. However, when the need arises to apply for capital, it is better to apply for a business loan and keep aside the equity money as a reserve for a rainy day. There are many financial institutions that offer business loans and equity partners to small and medium scale businesses. However, make sure you get hold of the best rates and repayment terms from a credible lender.
Before seeking a business loan, it is important to estimate the potential revenue and expenses to be incurred in the first years of operation. As a CFO, it is important to prepare a business plan that details the projected growth of the business, the costs involved, profit margin, expansion strategy, target customer etc. to understand the financial feasibility of the business. It is important to seek the help of a professional financial adviser to help you choose the best business loan vs equity loan deal.