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A Founder’s Guide to Debt and Equity Financing

Debt vs Equity. It’s a longstanding debate amongst the founder community. There are pros and cons to taking debt or equity and everyone’s situation is unique. Having spent over 10 years in the finance sector, our Investor Relations Director, Emily Smithies, shares her thoughts on the different options available. 

Untitled (6)Debt vs Equity: Which one is right for you? 

Unless you’re blessed with stockpiles of cash, chances are, funding has crossed your mind. Across the founder community, the good old “debt vs equity” debate has supporters on both sides. But the truth is, both options can achieve great things and whilst equity raises seem to grab the headlines, let’s not be too quick to dismiss the alternatives. 

Time to break down the narrative and review the options. 

What is Debt Financing?

The right type of debt, at the right time and for the right reason, can transform a business. It can fuel growth, help acquire assets or even give a founder peace of mind throughout the monthly cash flow swings. 

Debt finance comes in a variety of forms including credit cards, loans and overdrafts. But regardless of product, there are some blanket considerations to understand if you’re looking to take on borrowing. 

3 things to consider:  

  • Funding options: Different lenders offer different products. Loans, asset finance, invoice finance… the list goes on and it’s worth shopping around to understand what’s out there. But rather than trying to pick and choose between products, talk to different lenders about your company’s goals and leave it with them. They’ll be able to let you know which of their products best suit your needs. 
  • Serviceability: Lenders have a duty of care to lend responsibly and will usually ask to see your financials to check you can afford the borrowing. If you’re looking to approach a lender, start with a basic cash flow to see how much you can commit to each month.   
  • Security: Many lenders require some form of security. This could be a debenture, charge over a property or a personal guarantee. You need to be clear in your head about what types of security are available to put forward, as this may decipher the kind of borrowing you can access. Security helps to de-risk the lender, which can not only reduce the interest rate they charge you but could also be the deciding factor on whether they agree to lend or not. 

What is Equity Financing? 

The common alternative to debt is equity. This is where an investor provides capital in exchange for shares in your company. Equity funding can come from a variety of sources: private individuals, dedicated investment companies, crowdfunding platforms and even public placements (IPOs). 

Whilst they all follow the same fundamental principles - providing capital in exchange for equity - not all investors are created equal! There are several considerations you should make before deciding who to give a seat at your table. 

3 things to consider: 

  • Alignment: Choosing an investor is like choosing a personal trainer. Do you want an expert in Pilates or someone to help with general fitness? Someone to help perfect your form or someone who will take you on a transformational journey? Think carefully about what it is that you want for your business and if your potential investor is the right person to help deliver that vision. 
  • Go with your gut: I’ve seen several posts on LinkedIn recently about how to prepare for an investor pitch. Advice on how to dress and even how much make-up to wear! The truth is, if these things are even crossing your mind, you’re talking to the wrong investor. Don’t get me wrong, it’s important to be professional but please, please, please, be yourself! If they don’t like you for who you are, then they are not the right partner for your business. 
  • Ongoing relationship: Once your investor is on board, they are usually there for the long run. Some investors like to be super hands-on and others stepped back. Ask questions to potential investors and understand how they see the relationship working. Will they take a board seat? Are they simply providing capital or are they looking to be an embedded partner? Ask the questions and make sure their model is right for you.  

So, let’s summarise: 

If you’re looking to access capital to grow your business, there are lots of options available. Debt and equity often take centre stage but don’t forget to check for other forms of support, including eligible grants and business programmes you might be able to access.

The fundamentals of raising capital, whether it be debt or equity, are the same. 

The key thing is to understand your goals and what you need to get there, shop around and go with your instinct. If it doesn’t feel right, it probably isn’t! 

If you’re a founder looking for advice or investment, get in touch to find out how we can help

 

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