While capital is a necessary component for most businesses to scale and grow to the next phase, there are many factors to consider. Debt and equity financing each have their pros and cons, but the best option truly depends on your current needs and stage of business.
If you need a refresher, debt financing entails borrowing a fixed amount from a lender which is then paid back with interest. The different types generally include secured lines of credit, term loans, credit cards, and invoice/receivable financing, among others. Debt is a great option when you want to maintain control and ownership over your business. In many cases, interest payments are tax-deductible, leaving your business with more money in the end.
On the other hand, equity financing involves an investor purchasing a percentage of the business in exchange for capital. Equity is perfect for start-up businesses that need money to scale. However, a big exit or IPO can be a complicated process involving investor voting rights. If a founder’s vision doesn’t align with stakeholders, this can be a major source of conflict.
At a FastPay roundtable event, attendee Lori Murphree of Diamond Capital Advisors shared that “debt is cheaper at the end of the day, most people don’t realize that. If you’re going to sell your company for hundreds of millions of dollars, do the math!” She also mentioned, “you always want an AR lender that you can use for working capital. If you are going to raise equity, try to raise some debt to go with it.”
“At FastPay, we encourage companies to think of equity as a vehicle for long-term strategic growth and debt as working capital for operational needs,” said Caroline Zager, Associate of Business Development at FastPay.
The choice is ultimately dependent on the goals of your organization and what type of financial backing is needed to achieve them. If your company is new and full of growth potential, then equity may be the best option. If you’re a more established company in search of working capital, debt could be a better solution for your business. However, it’s best to reach a balance between the two to maximize financial growth and return.