Financing Using Equity vs. Debt

At various times in the life of a company there will be requirements for outside assistance in order to grow the business. One requirement will be the need for additional capital. Choosing which financing vehicle is best for your company is very important. It’s choosing the right tool to fix the problem.

Deciding whether to seek equity capital or DEBT FINANCING is the first step. Usually companies trying to get equity capital are very early stage with little or no real assets. While companies on their way to a steady growth curve use debt financing.

The equity route

As the owner of a BUSINESS IDEA, plan, or company – you hold ownership to a subjective value called equity. The equity of any type of property whether intellectual or physical is the value someone is willing to pay for it minus any liability attached to it. In business that could mean the value of an entity today measured in time and money invested versus the value in the future measured by comparable growth.

Once the owner and investor determine the “valuation” of the equity, the owner can then sell parts of the equity in order to RAISE CAPITAL.

On the debt side

Conversely, raising capital through debt financing does not entail “selling” your equity, but instead works by “borrowing” against it. Debt financing is only available to business owners who have something of value that the lender can instantly liquidate.

Many early stage companies turn to private commercial financing which is better suited to deal with riskier issues. FACTORING COMPANIES use the loans you make to customers (invoices for finished work) as the collateral for their funding. Here the emphasis will be the creditworthiness of your customers rather than the credit of your company. Equipment leasing companies will allow you to purchase new equipment and pay for it over time, usually three to five years.

At Newfound Capital we have many options available to you!!