Equity vs Debt Financing - What’s the Difference?

What is Equity Financing

Equity financing is based on selling a percentage of the company’s equity in exchange for capital. When a brand is in need of capital, it might decide that the best way to obtain it is selling 15% of its equity to an investor. That investor then owns 15% of the company, and has a say in all major business decisions. The money can be used to grow the business further.

Types of Equity Financing

There are various ways businesses can obtain equity financing. Here are a few examples:

Venture Capital Firms - Venture capital firms provide capital to businesses and typically skew toward up-and-coming, innovative (and often tech) businesses. The key factor here is potential: The company in question must show enough promise and growth potential that a VC investor is willing to take the leap to invest in them with belief in significant return.

Angel Investors - Angel Investors invest in early-stage companies and receive a percentage of equity in return. These investors are looking to invest in businesses with high potential. Uber, Facebook and others have benefited from this type of equity financing.

Crowdfunding - Crowdfunding is exactly what it sounds like: You receive money from a group of people that usually get something in return for their contribution. This could be a sample of your product, merch or a piece of the pie: a little bit of your company’s equity.

An Initial Public Offering (IPO) - Through an IPO, a privately held company makes its shares publicly available for purchase on a stock exchange.

Pros of Equity Financing

There are many benefits of equity financing, some of which include:

No repayments - Since equity financing does not involve any interest payments or fees, there are no regular payments that need to be made.

More cash on hand - Without monthly payments, the business has more capital available to invest in growing the business.

No Credit Issues - If you have experienced poor credit history or are lacking a financial track record, then equity financing might be the better option.

Cons of Equity Financing

Equity financing also has its downsides, such as:

Equity dilution - Giving away a percentage of ownership in exchange for capital dilutes equity and investors will expect a share of your profits.

Less decision-making authority - By selling a percentage of equity to an investor, the decision-making process involves all parties and investors may have control over key decisions.

Potential conflict - Since decisions have to be run by the investors since they own a percentage of it, all parties may not always agree on how to move the company forward, which may result in conflict.

What is Debt Financing

Debt financing involves the borrowing of money and repaying it with interest. When your business is in need of capital, you might seek out a loan, which is the most common form of debt financing.

Types of Debt Financing

Business Term Loans - You receive a fixed sum of money that you repay with interest over time. This type of loan can be used in almost any stage of your business and can help fuel your growth.

Lines of Credit - A flexible loan that acts like a credit card that you can use whenever you need cash. By repaying the borrowed amount, you regain access to the full amount of your line again that you can use when needed.

Inventory Financing  - You receive capital based on your inventory. Inventory financing (https://assembledbrands.com/inventory-financing) can be a great way to leverage your already existing assets to secure the needed capital.

Peer to Peer Funding - This is an alternative to borrowing money from a bank for your business and involves receiving funds from investors. Borrowers and investors are often matched via peer to peer lending websites, making this one of the newer funding options for brands.

Pros of Debt Financing

Some of the many benefits of debt financing include:

Keep Full Control - Lenders do not receive a percentage of your equity which keeps you in full control of your business.

Temporary Relationship - Partnerships with lenders are temporary in nature and may last a few years, unlike equity financing which is a more permanent arrangement.

Foreseeable Payments - Since the payments you make to the lender do not fluctuate, it is easy to plan ahead and forecast expenses.

Cons of Debt Financing

Debt financing comes with downsides such as:

Regular Payments - Regardless of your financial situation, you have to repay the loan including interest on a regular basis.

Restricted use of money - In some cases, lenders might restrict what you can use the money for or if additional funding can be procured elsewhere.

Default Risks- If you default on a loan, you might risk losing your assets that the lender will seize and liquidate to recover their investment.

Finance Your Business with Assembled Brands!

With an overwhelming amount of financing options available, you might wonder which option is the right fit for your business. The best choice may come down to a few factors unique to your particular situation. After reviewing your books and choosing the lenders that stand out to you, it is worth discussing your options to get a better understanding of what is being offered and what makes the most sense for your business.

The team at Assembled Brands is always happy to assist you in evaluating your options, even if your best one is not an asset-based loan.