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chapter three of six

Debt versus equity finance


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Debt versus equity finance

Most forms of funding fall into one of two camps. You can get a loan, or sell a share of your business to investors. Let’s look at the main pros and cons of debt versus equity and understand how they can help or hinder your business.

The difference between debt and equity funding

Debt is a loan that you have to pay back. Equity finance is what you get when you sell a stake in your business to someone else. They are very different things.

This doesn’t have to be an either/or choice. A combination of both debt and equity funding might be best for your business at times. But it pays to know what you’re getting into with each.

Pros and cons of debt vs equity financing

The pros and cons of debt
The pros and cons of equity

ownership
You're 100% in charge
You give up some of the business (and its profits)
Revenue
Have to use some revenue to pay back loan
Can put revenue into growing the business
Availability
debt – ownership
Support businesses that traditional lenders avoid
Application processes
Straightforward but not always speedy
Pitches require a lot of time and you'll need lawyers
Repayments
Regular with fixed or variable amounts
Dividends or returns expected eventually
Extras
May roll in other banking and credit services, plus insurance
Access to investor know-how and networks
Interest rates
Vary according to business risk (and can be unpredictable)
none
ownership
You may have to mortgage your house to get big money
Not required
If the business fails
debt – ownership
Investor loses their money
Expectations
Lenders want to know you'll repay them
Investors want to know you'll grow and make money for them
Exit strategy
There's usually no regular reporting obligations
You're not the only owner so getting out is complicated
Reporting
There's usually no regular reporting obligations
You have to provide reports to shareholders

Chapter 4, Main types of finance

It takes money to make money. Find out about the main types of finance that fund most businesses.

Read next chapter