At some point in your business journey, you might find yourself needing more capital. This can happen when you need to expand operations, buy new equipment, or manage cash flow during a slow season. Faced with this situation, it’s crucial to be able to choose the right source of funding. After all, not all capital is created equal, and selecting the wrong type of financing can create more problems for your business than the one it solves. Before this situation happens, you need to develop an understanding of the difference between debt and equity financing. Each source of funding comes with its own set of benefits and drawbacks, and the best choice will depend on your business’s needs, financial health, and long-term goals. Let’s take a closer look at each.
What Is Debt Financing?
Debt financing, simply put, is when you borrow money and agree to pay it back with interest over a specific period. When you apply for loans for businesses, you’re actually accessing this type of financing option. Maya Business, for instance, offers the most flexible business loan in the Philippines through Maya Flexi Loan. This financing option can instantly grant your business up to PHP 2 million in extra capital, and you can divide this into several loans as your situation needs. Aside from business loans, common examples of debt financing include lines of credit and credit cards.
Debt financing’s biggest appeal is that it lets you retain full ownership of your company. As long as you repay the loan according to the agreed terms, the lender has no claim to your profits or business decisions. This can be especially appealing if you value control and prefer to keep external influence to a minimum.
However, debt financing also comes with responsibility. Since you’re taking out a business banking loan, you need to make regular payments, regardless of how your business is performing. If your cash flow is inconsistent or if you’re still in the early stages of growth, being in debt can put extra pressure on your finances.
What Is Equity Financing?
Equity financing means raising money by selling shares of your business to investors. This can be done through angel investors, venture capital firms, or by taking your company public through an initial public offering (IPO). In exchange for their investment, these investors gain partial ownership of your business.
The primary advantage of equity financing is that there’s no obligation to repay the funds. Using this option, you can get access to capital without taking on debt, which can be a huge relief if your business is still growing or doesn’t have consistent revenue yet. Equity financing can also bring more than just money—investors often offer valuable experience, industry connections, and strategic guidance.
The trade-off, however, is control of your business. Since equity investors become part-owners, they often get a say in major business decisions. You’ll also be sharing a portion of your future profits with them. If you're not comfortable giving up some control or splitting future earnings, equity financing might not be the right path for you.
Additionally, finding the right investor takes time. You’ll need to pitch your business, show your growth potential, and convince them why your company is worth their money. It’s not just about raising funds—it's about forming a partnership that will shape the future of your business.
How Debt and Equity Financing Impact Your Business
Debt and equity financing affect your business in different ways—financially, operationally, and strategically.
With debt, your obligations are clear. You pay back what you owe, and once it’s settled, the relationship with the lender typically ends. There’s no dilution of ownership, and you maintain full control. However, this also means the pressure to perform financially is higher, especially if you’ve used assets as collateral.
Meanwhile, equity financing eases that pressure since there are no repayment schedules. But now, you’re not the sole decision-maker. You may need to get approval for major changes, and you’ll be accountable to your investors. Your business could grow faster with the right partners, but only if you're open to collaboration.
Both options also impact your company’s financial profile. Taking on debt adds liabilities to your balance sheet, which can influence your credit rating and future borrowing capacity. Equity doesn’t create debt, but it reduces your ownership stake, which may matter when it’s time to sell or take profits.
How to Choose the Right Financing Option for Your Business
The best financing method depends on your situation, goals, and risk tolerance. Here are some factors to consider when you’re deciding between these two options:
Stage of Your Business
If you’re in the startup phase and don’t yet have predictable revenue, equity financing might be more suitable. Investors are often more willing to take a chance on new ventures in exchange for equity. If your business is established and generating stable income, debt could be a safer and more affordable option.
Cash Flow
Evaluate your ability to make monthly payments. If cash flow is steady and reliable, you may be able to handle debt comfortably. If it fluctuates or you’re operating at a loss, equity can provide breathing room without having to deal with the pressure of immediate repayment.
Control and Ownership
Think about how much control you’re willing to share. If staying in charge is a priority, debt lets you fund growth without involving others in decision-making. If you're open to collaboration and willing to share ownership for the sake of faster growth, equity could work better.
Urgency of Funds
Debt financing is often quicker to secure, especially through banks or online lenders. Equity deals can take longer due to negotiations and due diligence. If you need cash fast, debt might be the better route.
Growth Potential
Businesses with high growth potential are attractive to investors, making it easier for these companies to secure equity financing. If your business isn’t positioned for rapid expansion, you may find it hard to attract investors and may need to consider debt instead.
Explore the Flexible Financing Options Offered by Maya Business
If you’re looking for financing options to sustain and grow your business, sign up for Maya Business so you can qualify for a no-collateral Maya Flexi Loan offer of up to PHP 2 million in just 3 months. Just use Maya as your primary processor for all wallet and card payments. The more you use our solutions, the better the loan offer will be.
Setting up a Maya Business account also lets you open a Maya Business Deposit account and use it as your settlement account. With an industry-leading 2.5% per annum interest rate, you’ll earn PHP 25,000 in interest per year on a PHP 1 million deposit. Plus, you can send money to your partners and suppliers for free via InstaPay and PESONet, reducing your overhead costs further.
Create a Maya Business account today to discover the ease and convenience that come with using Maya Business solutions.
