In order to expand, it’s necessary for business owners to tap financial resources which typically fall into two categories – Debt or Equity. In this article, Neil Large, Corporate Partner, explores the pros and cons of each.
Involves borrowing money to be repaid plus interest, while Equity involves raising money by selling an interest in your company. Debt also has a set time when the finance must be paid back, a set interest rate, and typically fixed or variable payments (capital and interest) that that need to be met each month. Many entrepreneurs prefer to use debt funding to facilitate business growth as there are no hidden costs and no need to give up any shares in the company. It also allows the owner to keep control of their business rather than having to negotiate, and incur the cost of, buying out an investor years down the line when business is going well to regain control.
Involves selling a stake (i.e. shares) in the company to an investor or individual (through a deal with a venture capitalist, a private equity fund, an angel investor, or crowdfunding platform) in return for receiving an equity investment to expand and grow the business. Equity funding allows the business owner to distribute the financial risk among a larger group of people. You won’t have to repay in regular instalments (particularly when your business is not making a profit) or deal with steep interest rates. If the business fails, none of the money needs to be repaid. Instead, investors will be partial owners of your company who are entitled to a portion of its profits, are likely to have a seat on the board of directors, will want to be provided with regular reports, and will have a say in key business decisions/actions which can not be taken without investor consent.
Debt versus Equity – which is best for your business and why?
The simple answer is that it depends. The equity versus debt decision relies on several factors such as the current economic climate, the business’ existing capital structure, and the business’ life cycle stage, to name a few. Whilst they are very different things, this doesn’t have to be an either/or choice – a combination of both debt and equity funding might be best for your business at times. But it pays to know what you’re getting into with each.
The Sills & Betteridge LLP Corporate Team have extensive experience working with businesses of all shapes and sizes, across all sectors, looking to raise finance for all kinds of purposes. We also for local and national private equity houses, venture capital funds, business angels, banks, asset based and other private lenders, on the full range of equity investment and debt lending transactions. Our experts see it from both sides and can help you navigate and assess all your funding options so you can make the correct informed decision which is best for your company.
For a free informal meeting or chat contact Neil Large, Corporate Partner on email@example.com or 07551576438.