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MONEY
YOUR MONEY | VC VIEWPOINT |
MONEY GUY | STARTUP FINANCE
| ASK THE MONEY GUY |
Money to grow on
Q: Should I go after debt financing
or new investors?
By Joe Worth
There are benefits to both: Giving up equity to
A: investors typically results in more money to grow
the business than you’d ever get from a lender, but debt
allows you to retain control. That makes it tough to
decide which route to pursue. Consider these factors.
Q
&
A
DEBT EQUITY WINNER
AVAILABILITY
If your company has been in business for less
than three years, has no record of regular
profitability or has a negative net worth, most
banks won’t take your call. Other options are
out there, including the SBA and nontraditional,
high-interest-rate lenders.
RISK
Taking on debt raises risk: Interest charges
increase your company’s break-even level, there’s
the possibility of foreclosure if the lender can’t
be paid, and principal and interest payments soak
up cash flow that could be used in stressful times.
In many cases, small-business loans involve
pledging personal assets, including your home,
as collateral.
Finding equity investors can be a long process
with an uncertain outcome. You could spend
months searching for funding in vain.
The investors assume nearly all the risk.
It’s a draw.
Equity.
CASH FLOW
Interest payments and bank fees are taxdeductible.
Taking on debt is also cheaper in
the long run than the time and consulting fees
involved in selling equity in a company.
There are no periodic payments, but there
are sizable upfront costs associated with
funding rounds: advisors, lawyers, outside
accountants, extensive travel and entertaining
potential investors.
Debt.
PAYBACK HORIZON
Debt can be short term, with lines of credit
that finance cash-flow swings, or long term,
with loans of seven or 10 years (or longer with
real-estate loans).
Equity financing is by nature a long-term deal
that’s more appropriate for sizable investments
in equipment or real estate.
Debt.
REPORTING AND COMPLIANCE
Assuming you’re careful not to violate the
covenants listed in a bank loan, all you need to
do is make your minimum monthly payment
on time.
All investors will want and be entitled to regular
reports of what’s going on with your company.
Does your accounting staff have the expertise and
bandwidth to handle these reports? In addition,
you may face monthly board meetings.
Debt.
EFFORT AND EXPENSE
Getting a bank loan is a straightforward process,
although it can require time to gather documents
and prepare the loan application.
You can work full time for months to close a
VC round. Few can afford to take their eyes off
the business for that long.
Debt.
ILLUSTRATION © GARY NEILL
62 ENTREPRENEUR MARCH 2015