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Equity financing, raising capital by selling company shares to investors, is most appropriate for high-risk high-growth technology and innovation startups, where the right investors can provide the company with industry experience, wisdom and business connections.
“Additional investors and shareholders also introduce other complexities in running a business,” says Daniel Goldberg, co-founder of Bridgement, a fintech company offering invoice financing and revolving credit facilities to small businesses.
Well-managed debt is well suited to short-term cash concerns and demands; “Working capital is a daily necessity for SMEs, they require a regular amount of cash to make routine payments, cover unexpected costs, and purchase basic materials used in the production of goods,” says Goldberg.
Companies are never totally certain what their earnings will amount to in the future. As a result, those in very stable industries with a consistent cash flow, are more likely to make use of debt than equity financing.
“Debt financing can be forecast and planned for. The interest of the loan can be deducted on the company’s tax return, reducing taxable income,” says Goldberg.
Goldberg outlines some of the debt financing options available to business owners: