Equity Financing & Short-Term Capital: What’s the Difference?
When clients come to us, they often ask about the benefits of short-term capital versus having an equity partner in their business. There are a lot of factors to consider when weighing what is in your best interests. Today, we’re taking a deeper dive into the differences between the two and why one might be a better bet for you.
What is Short-Term Capital?
When you reach out to a lender like ARF Financial for a loan, you are interested in borrowing money to finance your business. You’ll get access to cash essentially on-demand, but you’ll also be on the hook for paying interest and making weekly loan payments. Some lenders may require collateral, as well. It’s a great way to finance your business if you need to purchase additional inventory, make payroll, expand your bar area, etc. Short-term loans are certainly popular because of their relative ease to secure and the fact that they’re great for temporary financial needs.
What is Equity Financing?
When you choose to finance your small business ventures – whether you’re just starting up or looking to expand – with an equity partner, you’re inviting another person to invest in your company in exchange for a percentage of your business profits, part ownership, etc. Equity financing is defined as selling shares of your company stock in order to raise capital. Taking on a partner means you’re not risking putting your company in debt, as you may be when taking out a loan. You’re working with a human being, and you’re allowing another person to share in the responsibilities of owning a business.
Why Short-Term Capital?
Sticker shock might be the primary reason folks turn their noses up at the idea of a short-term loan. We get it—at face value, it can look unreasonable. The fact of the matter is that when weighed against an equity partner, a short-term loan is a significantly more cost-effective option. If you take out a loan, you’re going to be paying it back with interest. Depending on what your interest rate is, this could be a decent chunk of change. But when you bring in an equity partner at a certain percentage, you’ll actually end up owing them more money in the same amount of time because they are entitled to a percentage of your profits. The more successful you are, the more cash you’ll owe them. So that same $100,000 loan could end up costing you double, triple, quadruple the amount if you go the route of an equity partner.
Aside from the financial benefit to taking out a loan there is also the fact that without a partner, you only have to answer to yourself. That autonomy goes a long way. Additionally, any profits you make are all yours—not to be split with a partner. So you’ll be in total control of your business, from top to bottom.
ARF Financial has been leading the small-business loan industry for decades, helping secure millions of dollars in loans to help entrepreneurs and business owners reach their fullest potential. Once approved, we deliver immediate access to your funds, fixed payments, and flexible terms. Plus, you can defer up to 50 percent of your principal for even lower payments now. Not only do we offer best-in-class loan products, we’ve also always got a great deal cooking. Check out our current offers to learn what perks we’re presenting this month!