Small businesses in search of substantial funding often turn to one of two options: debt financing or equity financing. In the past, it was relatively easy to decide which option made the most sense for your needs and circumstances. The differences between the two were clear, since they each had unique advantages and disadvantages.
However, significant changes in the debt financing industry are causing this line to blur. Advantages that could previously only be accessed with equity financing are now available through various sources of debt financing. Many of these financial institutions were motivated by the increasing glamorization of equity financing, thanks in no small part to shows like Shark Tank. Here are three ways debt financing companies are adapting to compete with equity financing:
- Easier Access To Business Loans
Much of the stigma associated with business loans comes from the application process. Before the aforementioned industry shift, small-business loan applications were tedious, and you generally had to wait several months to learn if you had been approved. Both flaws are being phased out of the industry. It started with online lenders and forward-thinking companies, which rolled out one-page applications and often can approve loans in a matter of hours. Once these companies began to gain traction, traditional institutions like banks took notice. Today, some banks offer similarly sized applications and will get back to you in under a week.
Applicants still need strong cash flow to qualify for the best rates and terms, but the same can be said about equity financing. It’s difficult to attract investors without a proven foundation for revenue. Equity financing used to be the most viable option for young businesses, but you can now obtain substantial loans after just six months in business. So, if you can qualify for equity financing, you can likely qualify for debt financing, as well. The former is no longer dramatically more accessible than the latter.
- Emphasizing Slow And Steady Growth
Arguably the biggest advantage of equity financing is the amount of money you can get from angel investors or venture capital firms. While equity financing can raise millions for a new business, the largest business loans are typically reserved for established businesses. But if you look at virtually any article about business growth, you’ll see that the chief takeaway is usually, “Don’t try to grow too quickly.” It’s safe to say the likelihood of this common mistake increases when you put a massive budget in the hands of an inexperienced entrepreneur. From what I’ve seen, the entrepreneurial community has finally caught on to the dangers of rapid growth and changed its tone to, “Slow and steady wins the race.”
It’s feasible for young businesses to access vast amounts of working capital through debt financing, just not in one shot. Instead, I’ve seen clients of online or alternative lenders take out multiple rounds of funding over a number of years. At first, this might seem like a sign of a failing business. But it’s really just a slower, more sensible way to build the level of capital offered by investors.
- Offering Critical Advice To New Entrepreneurs
Another tremendously beneficial reward of equity financing is the guidance of your investor or firm. A great number of angel investors are retired entrepreneurs looking to bestow their experience and wisdom to younger generations. Venture capitalists tend to work with limited industries, because they know what works for these industries and can therefore apply proven strategies to each business. But relinquishing shares of ownership and managerial autonomy is no longer the only way to obtain valuable advice.
Business financing companies that stand out from the crowd are offering similar guidance about finance or general strategy to clients. I believe that if more business financing companies linked their success to the success of their clients and did whatever they could to help their businesses grow, new entrepreneurs would be less reluctant to pursue small-business loans instead of equity financing.
The Value Of Transparency
Debt financing and equity financing now offer similar advantages, but the disadvantages of debt financing (such as repayment and interest) are more out in the open, an important distinction in light of the value of simplicity and transparency in today’s market. Entrepreneurs would likely have an easier time choosing the option that makes sense for them if equity financing’s disadvantages were equally visible. As a result, the competition between the two options would escalate and ultimately create more advantageous offers for small businesses. Everyone wins when entrepreneurs have fewer misconceptions about the business financing industry.
Source: www.forbes.com
