Growing Your Business: Equity vs. Debt
Do you own a business in need of extra capital? There are many options out there, but the main two options boils down to: (1) finding a bank to offer you a loan or (2) looking for an investor who wants to buy equity in your business. But what’s the best option? What are the risks? How does one decide?
Very briefly, let’s look at the pros and cons of both debt and equity financing:
The Pros & Cons of Debt Financing
In as few words as possible, debt financing means you borrow money from a bank or other lender to support your current business operations with the intent to pay that amount back one day with interest. Any time you’ve ever used a loan, this was an example of debt financing.
- Qualifying for a loan can be more difficult than other kinds of funding.
- Failing to repay the loan could lead to your business being seized.
- Depending upon your business a lender may require a personal guaranty to back the debt.
- You are in control of how much capital will be spent. In some cases, there are lender restrictions but most of the time you are allowed to make decisions on what you finance yourself.
- All you have to do here is repay the loan. That is, there is no permanent impact on your business and how it operates beyond the need to service the debt during its term.
- This is a pretty flexible option with all kinds of loans and repayment options.
The Pros & Cons of Equity Financing
Unlike debt financing, where you borrow and repay money, equity financing is where you trade partial ownership of your company to an investor (often a venture capital or “angel” investor) in return for their capital.
In particular industries, equity financing is essential. This includes tech startups and firms who aspire to become global entities.
- This can be a much longer process than securing a loan from a lender or bank.
- This is generally implemented after your own resources and “friend and family” financial resources have been utilized.
- These investors require that you have “skin in the game”– your own money at risk.
- You are ultimately giving away part of your business – a permanent impact of your company’s future. This means you’ll have to consult with these investors before making decisions you would have otherwise made on your own.
- In some cases, you may even be forced out of your own business and made to abandon your participation in the efforts governing its success or failure.
- Your business has more cash available to it to operate and grow.
- The right investor can offer much more than just capital, including experience, insight, and connections.
- There is no obligation to repay a non-recourse investor financing if the business fails.
So, as you can see, it’s not going to be a quick decision, but rather something you need to research or plan. If you have any additional questions or other related legal issues, call Stephen Rizzieri at 214.434.1017 or fill out the form on our site today.