Deciding Whether To Raise Capital

Before I provide any advice about financing your Amazon Seller business I want to say something very important. Using financing creates additional risk for your business, so you have to think very carefully about how you finance your business. My number one piece of advice is NOT to use financing if you don't have to. If you have cash to invest in your business and can avoid using debt or equity financing, stick to cash. During my time lending money to small businesses at a finance company, I saw business owners take on debts that they were not able to pay back when their business performance changed.

Now realizing that most entrepreneurs don't have the ability to finance their business solely with cash, let's talk about the types of financing available for your small business. Broadly, there are two types of financing; debt and equity. Debt financing increases cash and creates a liability for your business (an amount your business owes) and equity financing increases cash by reducing the percentage of the business you own and increases the percentage someone else owns.

Pros and Cons of Debt and Equity Financing

When we talk about equity financing, we are talking about giving away a piece of ownership of your business in exchange for cash. Unlike with debt, equity holders get a return on their investment based on the business performance and there are no guaranteed returns. While most business would probably prefer equity financing, its not always available. For a small business an equity raise would more likely come from friends, family, or a new individual business partner rather than a venture capital or private equity firm.

Pros of equity financing:

• Does not create a liability

• No set payments to make

• No interest expense

• Provides more flexibility

• Expertise partners can bring

Cons of equity financing:

• Harder to obtain than debt financing

• Loss of some ownership

• Disputes with equity partners

• Demanding growth targets from partners

• Additional tax prep work

Pros and Cons of Debt Financing

When we talk about debt financing, we are talking about borrowing money in return for some interest on the use of that money along with some set repayment schedule of principal and interest payments. Unlike with equity financing, the lender expects repayment according to the agreed upon schedule regardless of business performance. Debt financing is more readily available to small business than equity financing and there is really something for everyone depending on the level of risk you present to the lender.

Pros of debt financing:

• Easier to obtain

• Many types of financing available

• May have a low interest rate

• No loss of company ownership

Cons of debt financing:

• Set payments regardless of business performance

• May require a personal guarantee

• May have a high interest rate

• Provides little flexibility

Main Takeaway

If you could walk away from reading this with some main points, here they are:

• Whenever possible, use your own cash to invest in your business.

• Debt financing provides very little flexibility for your business when things don't go as planned, but is easy to obtain.

• Equity financing may provide more flexibility for your business, but is harder to raise.