Got a great idea of a new venture but confused about financing it? Confronted with the ‘borrow or sell’ dilemma plaguing many new business owners? Here’s some insight that may help.
Whether to raise capital through borrowings or through equities by selling ownership is a decision influenced by many factors. As an entrepreneur you have to decide which is more feasible for you and your business, taking into consideration your liquidity, long term objectives and money raising capabilities.
Blessed is the person the worth of whose ideas are appreciated by family, friends and colleagues who lend to raise the initial capital. Another avenue is institutional finance: after examining the viability of your project, banks and financial institutions may lend capital at the prevailing rate of interest. The big plus of the option of borrowing is that you remain the sole owner responsible for all decisions and actions. The flip side is that you might need to mortgage your movable and immovable assets. Your borrowings would remain a liability and the interest payments an expense in your accounts.
Raising funds by way of public issue would require a thorough study of your project by banks and financial institutions. You would need to project the viability of your venture to the public to generate confidence in them to invest with you. While there is no fixed monthly repayment of loans or a schedule of repayment, investors are entitled to influence and question your business decisions. They have a stake in the ownership as well as share in your profits as per the proportion of their holdings.
While debt as a mode of financing is looked at for specific projects within a stipulated time frame, equity financing is usually associated with long term funding. Most ventures are a combination of debt and equity financing. Excess or very little of anything is not good. A high debt to equity ratio portrays a high risk business and developing such enterprises might prove difficult. Limited equity would not provide the required confidence and assurance either. A low debt to equity ratio implies ineffective use of liquidity and funds, effectively reducing profits to investors.
Decide your objective, check your liquidity and examine your requirements. Go ahead and make the decision.
If you have made such decisions or are associated with such decision making, would you like to share your experience? How did you decide which option works for you?
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