Advantages and disadvantages of debt and capital financing in SMEs

Advantages and disadvantages of debt and capital financing in SMEs

All companies need resources, and often require it in cash.

When they are in the start-up stage there are two ways to get resources for new businesses: debt financing and capital financing.

Here we are going to talk to you about the advantages and disadvantages of debt and capital financing that will be useful for you to make decisions as the owner or founder of an SME.


Debt financing

Debt financing

Acquiring a home or using a credit card is a form of debt financing. That is, you are borrowing something and you will pay it back with interest. This is how it works in SMEs. You are requesting a loan that you will have to return sooner or later with your respective interest.

The benefits of debt financing are many. The most important is that the lender never intervenes in the business and that the interest generated can be tax deductible. It is also easy to forecast payments because they do not vary.

On the other hand, the disadvantages have to do with the economy, since there are so many economic factors that you do not know if you will have the payment on time which puts the company’s finances and its growth capacity at risk.


Capital financing

Capital financing

To put it in practical terms, it is about attracting investors.

This is one of the means of financing for the company that requires analyzing more variables. Well, you are really opening the entrails of the firm to a foreign character who will be with you in bad times and in good times.

You can sell some actions for your friends and family but the real capital implies something stronger.

The advantage is that the investor takes a risk with you and that by not having debt financing payable, there will be more cash flow. Another advantage is that those who know about business understand that the recovery processes are long and that it will take time to see results.

The disadvantage has to do with sharing from profits to decisions and that the only way to cut with them is to buy them their shares that will probably sell you at a higher price than they invested.


And then … which one should I choose?

debt loan

The means of financing for SMEs are generally on the path of debt as investors are looking to capitalize on solid and global options.

But if you find capital financing be careful in the conditions in which it will be because the company could literally end up out of reach.