Funding, Growth, Legal

I need to raise capital to fund my business. Do I go for debt or equity funding?

StartupSmart
August 27, 2010
Equity investors have a wealth of experience and that can add so much to the expansion of your business.
Here are some of the key issues to consider:
  • The value of the advice from an equity investor.
  • Exchanging shares for equity – are you ready for that?
  • You will have a partner who will get involved if necessary.
  • The cost of raising capital.
  • The cash outflow to finance debt.
  • Risk of debt in this environment.
  • The time it takes to raise capital.
Think of money like anything else you might buy. When you buy a car you shop around for the best deal. Well, you should treat getting money exactly the same. Banks and investors are “selling” money at various prices. And some money suppliers will value add with advice and contacts.

Debt funding


There are many different forms of debt funding.
The three Fs tend to be a first port of call – friends, family and fools. Your rich uncle may take a liking to your idea and be prepared to back you into it. Generally, these people are very sympathetic and are not in it for the money. They want to help you make a start. Truly angels. This type of money can be either debt or equity.
A secured loan is the cheapest money you can access. The banks don’t really care about your business (regardless of what they might say) they just want security over your house, boat, children and the cat. So, secured debt is cheap money.
You can also lease, factor your invoices, get unsecured loans, use bartercard systems, etc. All these options are more expensive than secured loans but they are cheaper than equity.
Don’t forget using your credit cards for money. A colleague of mine applied for every credit card he could and maxed out on the credit limit before he gave up his job to start a business. He could get his hands on $97,500 instantly. That was very smart.Instant cash for emergencies! No security, no questions asked when he needed that cash, a great backup in times of a cash flow crisis. Mostly, credit cards are cheaper than equity.
So, go out and get every dollar you can through various debt sources, because it is the cheapest money and you can run the business the way you want to.
The downside:
  • You have to pay it back at regular intervals.
  • The amount is tied to the assets you own.
  • It reduces your flexibility.

Equity funding


There is a high price for equity. You exchange shares in your company for the money. So the capital you raise is linked to the value of your company.
Before looking for equity make sure that you have exhausted all opportunities for debt funding. Equity is more expensive and you will be taking on a business partner. The investor will own a share in your business and they will want to have a say in how it will be run.
By its very nature raising equity funding is more complex, it takes longer to do (endless meetings and cross checking) and there is lots of paperwork.
There are different ways to raise equity ranging from angel investors to a public listing on the stock exchange. It all depends on the stage of your business, the industry and your own preferences.

The biggest benefit from equity capital is the access to expertise and networks that you will get from your investors. Typically, equity investors have a wealth of experience and that can add so much to the expansion of your business.

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