Updated: Mar 3, 2020
Debt or Equity? That is the question.
Among all the things to think about when starting, growing or exiting a business; one of the most important considerations underlining your decision should be on how to capitalize your company.
Nearly all businesses need to raise capital to start, grow and succeed.
That said, the type of capital you raise could very well determine your level of success OR the limitations of your enterprise.
Saddle your business with too much debt early on and you could crater under crushing payments.
Give away too much equity and you might lose interest in your own company.
Your drive, idea and team are all important components however without a proper capital structure you’ll likely find your business hobbling along… wondering why it hasn’t taken off like it should.
Capital comes in an endless variety of shapes and sizes however it all generally boils down to either debt or equity. Here are some general points on the two:
DEBT – POSITIVES
Retain full ownership of your company.
Predictable fixed monthly obligations.
Interest portion of payments are tax deductible.
DEBT – CHALLENGES
Exceptionally difficult to access conventional debt for small/new business.
Generally higher interest rates.
Monthly payments due regardless of business performance.
EQUITY – POSITIVES
Can be a tool to attract and retain talent.
Equity partners typically only participate when there are profits.
Equity partners have a long-term vested interest in the business.
EQUITY – CHALLENGES
Founders can lose some control over the direction of the business.
Some equity partners have short term return goals which are at odds with the founders vision for the business.
Founders may need to divert time from building the business and dealing with equity partners.
Aside from deciding what kind of capital you need, you should also clearly think about who you’re going to for funding.
Different debt and/or equity sources will require different approaches. Working with people who know what they’re doing to help you navigate the markets is key. After all, it’s difficult to make a good second “first impression” on investors.
Finally, here are some additional questions to ask yourself when pursuing capital options
What are the costs to access the capital?
What kind of hoops do you need to jump through?
How much time will it take to raise the funds required?
Are there any additional fees?
What are your chances of success pursuing this form of capital?
What are your ongoing obligations to the investors/groups associated?
Aside from capital, can you expect any additional support from this source?
Is there a faster, cheaper or easier way to do this?
How does this source of capital tie into your long-term goals?
REMEMBER: THE BIGGEST CHEQUE MAKES THE RULES
Marcin has been instrumental in building several businesses including commercial & multi family real estate investment partnerships, a consulting practice and a smart home security business serving customers nationwide. Marcin has secured over $100MM in growth capital for various businesses and has collectively spoken in front of thousands of entrepreneurs, business owners, investors and those just starting to explore living life on their own terms. Outside the office Marcin can be found at the gym lifting heavy things, skiing or on the road zipping along on an extended bicycle ride.
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The information contained herein is for general guidance on matters of interest only. This information contained herein are not intended to provide you with any advice on financial planning, investment, insurance, legal, accounting, tax or similar matters and should not be relied upon for such purposes. www.MarcinDrozdz.com is not a financial or tax adviser. You should assess whether you require such advisers and additional information and, where appropriate, seek independent professional advice. www.MarcinDrozdz.com, its subsidiaries and affiliates, are not responsible in any manner for direct, indirect, special or consequential damages however caused arising from your use of the information contained herein.