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Equity vs Debt Financing | Meaning, benefits & drawbacks, choosing the most suitable - YouTube
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Welcome to knowledge series of CapSavvy.
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As an entrepreneur, several questions
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may have popped up in your mind
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before selecting the most appropriate funding option
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between Debt and Equity.
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Let us understand pros and cons of both the
options.
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Equity financing refers to the sale
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of a minority stake to raise funds.
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Equity financing can be raised
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either from third-party investors who have no existing
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stake in the business
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or from existing investors through the right issues.
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You can also obtain equity funding from
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investment banks,
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venture capitalists,
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PE firms,
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or large corporates.
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Equity financing is most suitable
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for businesses that are at an early stage
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and have no financial history or collateral.
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Equity financing allows the entrepreneurs
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to focus more on the business rather than
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bothering about the repayment of debt.
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At the same time, the risk of losing ownership
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and control is involved with equity financing.
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Debt financing refers to borrowing funds
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from a lender and then paying it back with interest
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over a defined period.
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Debt financing can be used
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for either working capital,
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long-term investment, or both.
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The three broad categories of debt financing are:
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loans and overdrafts, fixed-income debt securities,
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and finance secured on assets.
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Debt financing is appropriate
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for established businesses,
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but the credit score and the financial performance
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matters a lot here.
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Compared to equity options, debt financing
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is less expensive, and you can customize it
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according to the necessity of your business.
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Unlike equity, debt funding doesn't involve
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surrendering any part of ownership or control.
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The disadvantage of debt funding is that
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the process is time-consuming and lengthy.
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Debt funding is also not suitable
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for seasonal businesses or with erratic cash flows.
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As an entrepreneur, before finalizing
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the financing option, you need to consider the
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following questions:
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How much money do I need?
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Over what period will I be able to repay it?
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What exactly is the capital required for?
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Is there any collateral at my disposal?
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What are the taxation implications?
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Can the interest payment be met on time?
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Are the existing shareholders willing to relinquish
some control?
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Is the additional input of a new equity partner
warranted?
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Finding accurate answers to these questions
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may not be easy.
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But don't fret.
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CapSavvy is here to help you choose
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the best financing option
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available for your business.
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