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
