SME Times is powered by   
Search News
Just in:   • Equity indices break two-day losing streak on value buying  • IMF urges Sri Lanka to tighten monetary policy  • Global semiconductor sales to reach $676 bn this year: Gartner  • Tinna Rubber hits upper circuit, investors accumulate 900% returns in year  • Availability of jobs in Japan improves for 1st time in 3 yrs 
Last updated: 13 Aug, 2018  

Rupee.9.Thmb.jpg Why choose SME loan over equity financing?

   Top Stories
» Net direct tax collection reaches highest-ever figure in FY 22
» Musk has to manufacture here to sell Tesla cars in India: Gadkari
» Round tripping of industrial inputs by large players unfavourable to local value chains
» Sitharaman engages investors in Silicon Valley
» Modi hails India's success in achieving target of $400 billion of exports
Digikredit Finance Pvt Ltd. | 13 Aug, 2018

Every small enterprise needs business funding at some point or the other. Now, to raise this money, most business owners need to make a tough choice: between taking an SME loan and selling ownership interests to equity investors.

Equity financing is a way business can receive the required funds by selling shares in their business.

A debt arrangement means that a business owner borrows money, to be paid back at a later date, usually with interest.

While both options are viable and legal, it is important that you understand the pros and cons of choosing one over the other.

Debt is usually less expensive than giving up equity

Provided a company is expected to perform well, debt financing can usually be obtained at a lower, effective cost. Equity financing, on the other hand, costs businesses a portion of its revenue forever. While you have zero debt with equity financing, your personal profits are also slashed significantly for a lifetime as shareholders will always be getting a share in your net profits.

So, which is better? Equity funding means sacrificing both current and future value to fill a short term need. With debt, you incur interest costs, but it is temporary and capped.

Debt can be cheaper than opportunity cost

Sometimes, a small business needs SME loans to grow its operations but is able to attain it only at an absurdly high rate. Even then, if the return on investment is forecasted high, that business funding can be a strategically favourable choice for a businessman who wants to open up new growth channels. Always remember, whenever the return is higher, the debt is worth it.

Paying interest on debt reduces the tax burden

The tax system offers an advantage to financing capital expenditures through debt. Under the current tax law, businesses can deduct their interest payments on the debt instruments. This reduces the tax applicable on any new business.

This, unfortunately, is not true of equity financing which is actually taxed twice.

Debt encourages discipline

Discipline is important in any business. SME loan boosts discipline by regularly matching cash flow with financial statements and balance sheets. When a company opts for business funding, its business operations are routine and unnecessary expenses are held back.

Debt funding can be used as a strategic tool for growing a business. As seen above, it is often a much cheaper financing option than equity financing, which usually ends up taking a larger share of your business' profits than a bank or other lender.

Take an informed decision; weigh the pros and cons of both in order to keep your business growing.

** By association with Digikredit Finance Pvt Ltd., an NBFC, which operates under the name SMEcorner and offers credit to small business owners.

Print the Page Add to Favorite
Share this on :

Please comment on this story:
Subject :
(Maximum 1500 characters)  Characters left 1500
Your name:

Debt funding v/s equity
RAJESH CHANDRA AGARWAL. | Wed Aug 15 04:46:40 2018
Business needs cheap money and freedom to work. Bank officers (Banks) have their risk taking limitations; they have a secure job to worry about. Money is not always needed for expansion and business(es) and markets do not perform on project reports. The Laws are becoming so tough that it will be sensible to take a loan only if it can be serviced from another activity.Similarly if long term growth and family security is a concern a Debt/Equity should never be more than 1:1. One must never forget that if a business goes bad for any reason the Lonee is treaded like a swindler without hearing or sympathy. Therefore try your best to work without a loan or limit, with market credit loan liability must be very very limited. It CAN LEAD TO A FAMILY DISASTER THAT IS UNTHINKABLE/IMAGINABLE

  Customs Exchange Rates
Currency Import Export
US Dollar
UK Pound
Japanese Yen 58.85 56.85
As on 27 Apr, 2022
  Daily Poll
COVID-19 has directly affected your business
 Can't say
  Commented Stories
About Us  |   Advertise with Us  
  Useful Links  |   Terms and Conditions  |   Disclaimer  |   Contact Us  
Follow Us : Facebook Twitter