Debt or equity? That is the question

When you need some additional capital to start or grow your business, there are two fundamental choices: borrowing the money in the form of debt, or finding investors and offering them some equity in the business.
 
Of course, there are pros and cons of each approach and you will need to weigh these up carefully to decide which is the right one for you.  In summary:
 
Debt
 
Pros Cons
You remain fully in control of your business You will be committed to a repayment schedule, which could be fixed
You can budget for the repayment of capital and interest You are likely to need to pledge security, which could involve your personal assets
The interest charges and fees can be set-off against your taxable profit   
There are many forms of debt available, which can be matched to your needs  
 
Equity
 
Pros Cons
You won't need to budget for regular repayments of capital and interest An investor is likely to demand a say in your business to protect their investment
You won't need to pledge business or personal assets as security You could end up with a disproportionately small return on all your hard work if you give too much away
  Investors can be hard to find (and even harder to please!)  
 
Crowdfunding has become popular in recent years as a means of raising investment as it offsets some of the disadvantages mentioned above. Investors are easier to find because the platform does it for you and, as each individual investor is likely to only have a small share, they won't wield significant influence over your business on their own.
 
Crowdfunding isn't all plain sailing though: not every raise is fully funded, in which case often none of the money is passed over; the platform takes a proportion of the money raised as its fee, sometimes in the region of 5%; and you could still end up in a situation where you have given a large slice of your business away when your negotiating position is at its weakest.
 
Business owners appear to be wise to this. Recent research by SME credit specialist, Caple, showed that more than half (53%) of business owners would be unlikely to issue equity to fund growth and more than three quarters (76%), would prefer to raise money through long-term debt.
 
We believe it is important to undertake a full review of your short and long-term funding needs. before deciding on either approach. Financing a business over the long term requires a strategy and it is easy to make the wrong decisions when you need the money the most. For example, we often encounter businesses that have pledged all their security in the form of a debenture in the early days when their funding needs where relatively small. This can make it complicated when it comes to getting the original lender to release their debenture later on should additional funding lines be needed.
 
Here at Productivity Finance, our role is to help you make sure that the finance you raise now is sufficient, properly structured and has more than one eye on the future when it comes to security.  Ask us for a consultation. 

30th November 18


Debt or equity? That is the question


By: Paul Marston

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