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Small Business Loans: Equity and Debt Financing

Just as every business is unique, so are the various types of small business loans available to you. The right combination of loans can help to move any business from possible success and possible failure into sure success. As a new business owner, though, it may be difficult for you to understand exactly what type of financing is the right type for your business. Take into consideration the types of small business loans available to you. Two of the most common choices that you must make a decision about are equity financing and debt financing.

The Type Of Money Matters

These two types of financing are very different and they won’t be available to everyone either. When you are borrowing money, you need to take into consideration your business’s debt to equity ratio. Debt is money that is borrowed in some form. Equity is money that has been invested into the business therefore increasing the overall value of the business. Debt, just like in a personal situation, is not what you want to see more of. Instead, you want to see more equity whenever possible. In fact, when your business has more equity than it does debt, you’ll be able to secure more small business loans and even other types of loans. It looks good because your business is then more valuable.

If your business does have a higher percentage of debt than it does to equity (which most businesses do at the beginning) then you will probably need to get more debt financing, because equity financing simply isn’t as readily available. On the other hand, if you do have equity built into your business, you’ll find that it is one of the best tools that you have for borrowing money. This is called an equity investment that will add funds to your business. Not only is equity financing a better choice for your business all around, but it also provides for a less expensive means of borrowing funds than debt does.

A credit card is costly debt financing whereas a home loan has a much lower rate of interest and therefore is more affordable. The same situation is true for small business loans. The more secure the funding of a loan is, the less risk there is, which translates into lower interest payments. As a small business owner, you need to know which type of small business loan you can secure.

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