Imagine being able to start or buy your own business without accruing any debt. You wouldn’t have to worry about interest rates, monthly payments, impact on your credit score or collateral. Does this sound like a pipe dream?
No, this is known as equity financing. It’s a method for funding your small business using assets you already own, so you don’t have to take on new debt.
Equity Financing Explained
In most cases, equity financing is the raising of business capital by selling shares of your business. However, it can also involve reinvesting assets you already own, whether from stocks/bonds in your investment portfolio, savings, or even retirement assets using a process known as ROBS, or Rollovers for Business Start-ups.
There are several benefits of equity financing over traditional debt financing. First of all, since you are starting your business with money/assets you already own, you don’t have to worry about eligibility requirements and there’s no impact on your credit score. In addition, since the money is yours in the first place, you don’t have to worry about paying it back with interest.
For many entrepreneurs, equity financing is a great option. After all, since there are no monthly payments, they can generate a profit much faster.
Debt Financing Explained
Perhaps your situation is such that your assets are not enough to start a business, or you don’t want to roll over your retirement savings into a business. In this case, traditional debt financing may be a practical option. This includes bank loans and SBA loans.
For many small business owners, SBA loans are the preferred method since they’re backed by the government. This means if you default, the government will pay the lender a certain amount. Also, they usually have longer terms and lower interest rates, which makes it easier to make monthly payments.
However, SBA loans are not typically the most cost-effective or efficient. They can take 120 days or more to finalize. This is longer than most entrepreneurs want to wait, especially if they are in a time crunch.
Additionally, most banks prefer that you have a credit score of 640+, three years experience in the industry, personal collateral to back the loan, and proof of a secondary income.
The Ideal Solution
More and more entrepreneurs are taking a hybrid approach and combining the two forms of financing to increase their access to capital and reduce how much they need to borrow.
One way to do this is to combine ROBS with an SBA loan. This reduces the amount you need through the loan, which means less you have to pay back. Plus, since most loans require a 20% to 30% down payment, the funds from ROBS can cover that, which means you don’t have to use your savings.
Let Us Help You
The professionals at Jasema Capital are standing by to help you get you on the road to becoming a business owner. We can guide you through the process and explain the advantages and disadvantages of debt financing versus equity financing.