There are two main types of financing available for companies: debt and equity. Debt is a loan that must be paid back often with interest, but it is typically cheaper than raising capital because of tax deduction considerations. Equity does not need to be paid back, but it relinquishes ownership stakes to the shareholder. Both debt and equity have their advantages and disadvantages. Most companies use a combination of both to finance operations.
Debt financing
Most people are familiar with debt as a form of financing because they have car loans or mortgages. Debt is also a common form of financing for new businesses. Debt financing must be repaid, and lenders want to be paid a rate of interest in exchange for the use of their money. The annual market interest rate is at the range of 2% - 5%. For example, if Bulgarian company receives a loan for EUR 100 000 the monthly interest liability would be EUR 247. Adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, including the debt payment.
Equity Financing
Equity is another word for ownership in a company. Giving up equity is giving up some control. Equity investors want to have a say in how the company is operated, especially in difficult times, and are often entitled to votes based on the number of shares held. So, in exchange for ownership, an investor gives his money to a company and receives some claim on future earnings. The one of the biggest disadvantages of equity financing is that you will have to consult with your investors before making decisions. Your company is no longer solely yours, and if the investor has more than 50% of your company, you have a boss to whom you have to answer.
Additional money contribution
In Bulgaria there is an alternative solution to avoid all disadvantages of debt and equity financing, it is called additional money contribution. For instance, if you have a company in Bulgaria and company in Spain and you want the Bulgarian company to fund the Spanish one you need to merge your companies as Bulgarian company buy the Spanish one. In that case there is a legal possibility to finance the Spanish company as additional money contribution to the Spanish company's capital. The Bulgarian legislation does not require interest to be charged. So that the provided money will be with 0 interest and in the long-term perspective you will save a lot of money because you will not be obliged by the law to charge any interest.
Stan Consulting may advice you what will be the most beneficial way to finance your business, so please feel free to contact us.