Debt or Equity Capital? Deciding Which Is Best For Your Business

Depending on your company’s situation, different forms of capital may be better than others. This blog will help you decide what form is best for your business.

The Types of Capital

Equity Capital

Equity capital transactions involve an individual or entity purchasing ownership in a company. The company receives funds from the investor, and in return, the investor owns part of your company.

Typical transaction types include:

• Alternative Public Offerings
• Self-Listings
• IPO
• PIPEs
• Venture Capital
• Private Equity
• Family Offices
• Private Placements
• M&A Financings

Advantages:

• The capital a company receives is permanent capital, and generally does not have to be paid back
• Equity capital has great flexibility with regard to structure

Disadvantages:

• Dilution
• Often used to give preferential or disproportionate rights to investor as opposed to existing stockholders
• Difficult to remove or eliminate troublesome equity holders

Debt Capital

Debt capital transactions involve borrowing money from a lender, and paying that money back to the lender over a set period of time, as well as interest.

Learn more about what alternative lenders are offering: Commercial Credit: What Alternative Lenders Are Offering

Typical transaction types include:

• Alternative Commercial Credit
• Asset-Based Loans
• Cash Flow Loans
• M&A Financings
• Term Loans
• Factoring
• Mezzanine

Advantages:

• Lender does not have vote with regard to corporate matters
• No dilution
• The fixed return permits a company to arbitrage between the increase in value the capital will create, and the fixed price they have to pay for that capital

Disadvantages:

• Has to be paid back
• Is senior to all equity
• May restrict actions by existing stockholders

Convertible Debt

Convertible debt transactions involve a loan with the ability for that lender to convert into equity.

Typical transaction types include:

• Convertible Debt
• Bridge Financings
• Mezzanine
• M&A Financings

Advantages: 

• Fixed current return
• Under the right circumstances, does not have to be paid back
• Very attractive to risk-averse investors

Disadvantages:

• Dilution
• Until converted, may restrict corporate actions by stockholders
• Senior to all equity holders until converted

Wondering what capital is best for your company? Let’s discuss. Get in touch with our team below.