Check Out Two Major Types Of Financing

Financing is the usage or the providing of funds for business purposes and investing. It is the same as finance, which is the study of how investors distribute their wealth over time in order to make more wealth. There are two major types of financing.

These are:

• Equity financing
• Debt financing

Equity Financing

This is the giving out of shares in exchange for money that is invested in your business. It involves the stock market where people trade in company shares. The concept of equity financing is very simple. You buy the shares of a certain company that you are interested in and you own that percentage of the company.

There are very many reasons as to why people invest in equity finance. Some of its advantages include:

•  As the business owner, if your business fails, you have no obligation to pay back those people that invested in your company. When they decide to buy into your company, they enjoy both your profits and your losses.
•  It is an easy way of raising needed capital
•  It is also less risky. You have the power to decide which percentage of your company is being sold out. This means that you can always ensure that you are the majority shareholder. For example, you can decide to sell equity equivalent to 41% of your company making you the majority share holder with 51%. Most small businesses fear equity financing since they will be selling out their company to strangers yet they have worked so hard to start the business on their own. However, as you can see, mere cleverness can still make you the owner of the business.
•  Bigger profits. Most people who want to try equity financing usually have a strategy in place on how to improve their business. When people invest in your business, it means that they believe that your business will triumph. 

Therefore as you increase the capital, you are also increasing your profits.

Debt Financing

On the other hand, debt financing involves taking a loan and paying back its principle and interest. Just like equity financing, debt financing also has its advantages.

•  You are in control. Debt financing will not let other people manage or influence the way you run your company. You will therefore still have full control of the business. It is a common fear among people who are thinking of taking on either equity financing or debt financing about the future of their company.
•  You will pay less in taxes. This is because the interest that you will pay back for the loan is tax deductible. This will in turn lower your tax liability.
•  You do not split your profits. Unlike in equity financing where you have to share your profits with all the investors, debt financing does not entail this. You will get your profit which is by no means accessible to the loaners.
•  The loan does not have to be too big that you have problems paying it back. Take a sizeable loan that you can easily pay off.

Roberta Bookeris a finance consultant who also travels a lot in a year. He thinks that business should be mixed with pleasure some times. He learned about tax planning from the works of Isidor Hefter.

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