Debt or Equity? Which is Superior For Your Franchise?
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Frank J. Lucer
Apr 18, 2010, 2:25:04 PM4/18/10
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Please consider this free-reprint article written by:
Frank J. Lucer
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Article Title: Debt or Equity? Which is Superior For Your Franchise?
Author: Frank J. Lucer
Word Count: 758
Article URL: http://www.isnare.com/?aid=502956&ca=Business+Management
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=502956
Easy Publish Tool: http://www.isnare.com/html.php?aid=502956
*********************** ARTICLE START ***********************
The available source of funding is the engine of development for many smaller businesses. With it, you can develop your small business and explore potentially lucrative possibilities. Without it, you could be compelled to build your business at a snail's rate.
The two methods of obtaining the financial resources your business needs: debt and equity. The former signifies funds you'll need to pay back - usually with interest. The second option represents funds you'll receive in exchange for an ownership share of your company; in this short article, we'll explore the advantages and drawbacks of using both options of financing.
Advantages Of Borrowing Capital
Loan financing usually takes a few forms. For instance, you can approach the bank for a short-term bridge loan, line of credit, or long-term commercial loan with terms that extend over several years. It's worth mentioning that when you borrow funds for the company, the unsettled debt is recognized as a liability (from an accounting viewpoint).
The benefits of credit involve tax write-offs, undiluted possession of the small business, and flexibility within your company's credit debt portfolio. First, regarding taxes, the interest you pay back on the amount you borrow is deductible; it is regarded as a business cost. Second, lenders do not receive an ownership position in your company. Third, as already implied, you will find myriad varieties of borrowing, that provides you with lots of versatility to customize the debt portfolio for your desires.
Drawbacks Of Borrowing Funds
Among the drawbacks of credit is the fact that you'll eventually need to pay back the amount you borrowed with interest. That increases the break-even point.
One more drawback is the majority of debt tools have terms that require scheduled repayments; even if your small business is experiencing a cash flow shortfall, you still need to fulfill the conditions to which you agreed.
Also, according to the association you might have with the lender, the quantity you wish to borrow, as well as your company's track record, you might be required to promise collateral; if you go into default on the loan, this collateral could be seized.
Advantages Of Equity Capital
Equity funding is generally provided by investment capital companies, private investors, and family and friends. These people agree to produce funds in exchange for an ownership position in your company.
Many entrepreneurs and small enterprise owners select this form of funding mainly because they cannot borrow capital at a affordable interest rate. Or, they're uncertain regarding their capability to accomplish this. Equity precludes their need to qualify to borrow.
An additional advantage is that you are not required to meet a pre-established payment schedule of principle and interest; instead, investors are compensated through long-term growth, distribution of annual earnings, and capital gains after selling of their respective stakes.
Additionally, in case your small business does not produce a income, you're not legally compelled to pay back your investors; nor could your investors seize the assets.
Drawbacks Of Equity Financing
The two main main disadvantages to utilizing equity financing. First, surrendering an ownership stake to a new party affects your autonomy in making decisions for the company, this could restrict your versatility regarding business strategy and creative control. Moreover, should you cede an ownership position to a number of parties, your flexibility is further restricted.
Second, because equity dilutes the ownership, it dilutes your privileges on the profit your business creates; in relinquishing shares of the company in exchange for capital, you essentially lose that bit of your business.
Blending The two Sources Of Financing
Preferably, you should pursue both kinds of financing. Strive for a balance around an even split (i.e. 1:1 debt-to-equity ratio) to double equity as debt (i.e. 1:2 ratio). Too much debt exposes you to short-term marketplace volatility; a downturn in demand from customers could make it tough to service the debt; on another hand, too much equity can significantly dilute your possession and limit your control.
With the above in mind, it's important to note that every business is distinct. Startups usually have much more equity than debt because of a reduced credit history; proven businesses will have a much more balanced debt-to-equity ratio; as your company expands, keep the benefits and drawbacks of the two kinds of financing in mind to develop a well balanced portfolio that accommodates your needs.
About The Author: This informative article, prepared by Frank Lucer, is made available by http://www.AmericasBestFranchises.com, where you can make the most effective choices regarding your http://www.americasbestfranchises.com/
Please use the HTML version of this article at:
http://www.isnare.com/html.php?aid=502956
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Please consider this free-reprint article written by:
Frank J. Lucer
*****************************
IMPORTANT - Publication/Reprint Terms
- You have permission to publish this article electronically in free-only publications such as a website or an ezine as long as the bylines are included.
- You are not allowed to use this article for commercial purposes. The article should only be reprinted in a publicly accessible website and not in a members-only commercial site.
- You are not allowed to post/reprint this article in any sites/publications that contains or supports hate, violence, porn and warez or any indecent and illegal sites/publications.
- You are not allowed to use this article in UCE (Unsolicited Commercial Email) or SPAM. This article MUST be distributed in an opt-in email list only.
- If you distribute this article in an ezine or newsletter, we ask that you send a copy of the newsletter or ezine that contains the article to http://www.isnare.com/eta.php?aid=502956
- If you post this article in a website/forum/blog, ALL links MUST be set to hyperlinks and we ask that you send a copy of the URL where the article is posted to http://www.isnare.com/eta.php?aid=502956
- We request that you ask permission from the author if you want to publish this article in print.
The role of iSnare.com is only to distribute this article as part of its Article Distribution feature ( http://www.isnare.com/distribution.php ). iSnare.com does NOT own this article, please respect the author's copyright and this publication/reprint terms. If you do not agree to any of these terms, please do not reprint or publish this article.
*****************************
Article Title: Debt or Equity? Which is Superior For Your Franchise?
Author: Frank J. Lucer
Word Count: 758
Article URL: http://www.isnare.com/?aid=502956&ca=Business+Management
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=502956
Easy Publish Tool: http://www.isnare.com/html.php?aid=502956
*********************** ARTICLE START ***********************
The available source of funding is the engine of development for many smaller businesses. With it, you can develop your small business and explore potentially lucrative possibilities. Without it, you could be compelled to build your business at a snail's rate.
The two methods of obtaining the financial resources your business needs: debt and equity. The former signifies funds you'll need to pay back - usually with interest. The second option represents funds you'll receive in exchange for an ownership share of your company; in this short article, we'll explore the advantages and drawbacks of using both options of financing.
Advantages Of Borrowing Capital
Loan financing usually takes a few forms. For instance, you can approach the bank for a short-term bridge loan, line of credit, or long-term commercial loan with terms that extend over several years. It's worth mentioning that when you borrow funds for the company, the unsettled debt is recognized as a liability (from an accounting viewpoint).
The benefits of credit involve tax write-offs, undiluted possession of the small business, and flexibility within your company's credit debt portfolio. First, regarding taxes, the interest you pay back on the amount you borrow is deductible; it is regarded as a business cost. Second, lenders do not receive an ownership position in your company. Third, as already implied, you will find myriad varieties of borrowing, that provides you with lots of versatility to customize the debt portfolio for your desires.
Drawbacks Of Borrowing Funds
Among the drawbacks of credit is the fact that you'll eventually need to pay back the amount you borrowed with interest. That increases the break-even point.
One more drawback is the majority of debt tools have terms that require scheduled repayments; even if your small business is experiencing a cash flow shortfall, you still need to fulfill the conditions to which you agreed.
Also, according to the association you might have with the lender, the quantity you wish to borrow, as well as your company's track record, you might be required to promise collateral; if you go into default on the loan, this collateral could be seized.
Advantages Of Equity Capital
Equity funding is generally provided by investment capital companies, private investors, and family and friends. These people agree to produce funds in exchange for an ownership position in your company.
Many entrepreneurs and small enterprise owners select this form of funding mainly because they cannot borrow capital at a affordable interest rate. Or, they're uncertain regarding their capability to accomplish this. Equity precludes their need to qualify to borrow.
An additional advantage is that you are not required to meet a pre-established payment schedule of principle and interest; instead, investors are compensated through long-term growth, distribution of annual earnings, and capital gains after selling of their respective stakes.
Additionally, in case your small business does not produce a income, you're not legally compelled to pay back your investors; nor could your investors seize the assets.
Drawbacks Of Equity Financing
The two main main disadvantages to utilizing equity financing. First, surrendering an ownership stake to a new party affects your autonomy in making decisions for the company, this could restrict your versatility regarding business strategy and creative control. Moreover, should you cede an ownership position to a number of parties, your flexibility is further restricted.
Second, because equity dilutes the ownership, it dilutes your privileges on the profit your business creates; in relinquishing shares of the company in exchange for capital, you essentially lose that bit of your business.
Blending The two Sources Of Financing
Preferably, you should pursue both kinds of financing. Strive for a balance around an even split (i.e. 1:1 debt-to-equity ratio) to double equity as debt (i.e. 1:2 ratio). Too much debt exposes you to short-term marketplace volatility; a downturn in demand from customers could make it tough to service the debt; on another hand, too much equity can significantly dilute your possession and limit your control.
With the above in mind, it's important to note that every business is distinct. Startups usually have much more equity than debt because of a reduced credit history; proven businesses will have a much more balanced debt-to-equity ratio; as your company expands, keep the benefits and drawbacks of the two kinds of financing in mind to develop a well balanced portfolio that accommodates your needs.
About The Author: This informative article, prepared by Frank Lucer, is made available by http://www.AmericasBestFranchises.com, where you can make the most effective choices regarding your http://www.americasbestfranchises.com/
Please use the HTML version of this article at:
http://www.isnare.com/html.php?aid=502956
*********************** ARTICLE END ***********************
- To distribute your articles go to http://www.isnare.com/distribution.php
- For more free-reprint articles go to http://www.isnare.com --
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