Debt v equity financing – which is right for your business? – Last Friday Blog
No matter how big or small your business, or which sector you operate in, having the right financing in place is crucial to delivering long-term success.
The majority of organisations out there rely on some form of external financing, from conventional bank debt (overdrafts, term loans etc.) through to crowdfunding, venture capital and private equity. But how do you know which one is best for your business?
In simple terms there are two distinct categories of financing available – debt and equity.
Every business is different, and every business plan is unique, so it’s important to spend time with your advisor to fully understand the options available and identify the pros and cons of each.
Debunking debt financing
Traditionally debt funding was provided by high-street banks, but over recent years this market has grown to also include independent asset based lenders and crowdfunding platforms who provide alternative sources of financing.
If security is obtainable from the asset base of the business, debt funding is generally easily and cheaply available. In certain circumstances where strong cashflows exist, debt funders can provide a cash flow loan which is typically secured on the future cash flows of the business, rather than its asset base.
Maximising available debt funding is a popular choice for many business owners as they retain 100% ownership/control and tax deductions are often available. However it’s not for everyone – particularly early stage businesses who may lack security and/or the ability to service the debt repayments.
Equity financing – what is it all about?
Equity investment occurs when new finance is raised through the sale or issue of shares in the company. There are numerous active equity investors in the UK including business angels, crowdfunding platforms, venture capital funds and private equity investors. This market sector has boomed in recent years and includes numerous specialist and general investors with substantial cash available for exciting investment opportunities.
Early stage businesses with significant growth potential are likely to be more suited to equity investment than debt, and there is a well-developed market of angel and venture capital investors focused exclusively on this sector.
Private equity investors target established businesses with a strong management team, robust financials, a clear (and preferably differentiated) product or service proposition and good growth prospects. The process of securing the investment is very detailed and can be lengthy and intrusive but once the deal completes, the company will have a significant pot of new funding with which to execute its plans. Equity investments can be structured in many ways depending on the circumstances of the investee company. In all cases however the owners have new partners who own an equity stake in the business and have rights in relation to how the business is operated going forward.
Which route to go down?
Ultimately, the opportunity to raise debt or equity funding (or indeed a combination of the two) depends on a range of factors. These include the type of business, at what stage it is in its lifecycle, its asset base, its profitability and most importantly, the attitude / appetite of shareholders and management.
Using our expertise and experience, we can work with you to determine the most appropriate route. In order to do this, we would first help you to prepare a robust plan based on your business model. We would then introduce you to the most relevant funders and assist you in negotiating with them to achieve the best possible outcome for the business and its shareholders. The result will be a business with an appropriate funding structure and long term partners that have bought into the company’s strategy and plans.