There’s no shortage of options when it comes to finding capital to fuel your business’s growth. Your choice will depend on your company’s cash flow, income, business risk, and ownership.
Should you consider debt or equity financing? Each choice has distinct advantages and weaknesses—both short and long-term.
If your company boasts healthy numbers and cash flow, you’ll find plenty of debt financing available at historically low rates. You’ll repay the loan under specific terms regardless of your business’s performance or prevailing economic conditions.
Equity financing allows you to exchange a percentage of your company’s holdings for capital. You’ll share profits, ownership, and some control over operations and long-term strategy.
Optimal capital structure for larger companies typically involves a mix of both debt and equity financing, which may fluctuate over time.
Understand each type of financing
Is the lower cost of debt worth the default risks if repayments can’t be made? Is equity’s flexibility worth giving up part of the business? Talk to your bankers, advisors, and management team about the source that fits best with your next capital raise.
Change your debt-to-equity mix.
What if you if you need more capital or want to access some of the value tied up in company’s equity? There are several ways to go about it.
Equity buyback – You may be able to change your company’s equity-to-debt balance. If your business relinquished capital during a start-up or growth phase, you can reclaim or even recapitalize that equity through debt financing.
For example, a direct seller and marketer of natural food supplements secured $130 million in credit with Truist’s help to buy back a significant portion of the equity it had previously sold to a private equity firm while also gaining access to additional working capital.
Debt refinancing – Debt can be used to refinance capital at a better interest rate. Be sure to monitor the interest rates of your existing loans and lines of credit. Keep in mind that lowering your company’s overall debt serving costs makes it easier to obtain additional capital in the future.
Adding debt – Startup businesses typically aren’t well suited for fixed payments required by most debt obligations. Early-stage capital is often tied to equity, but it doesn’t have to stay that way. When cash flow predictability increases as your business matures, you may want to consider shifting more debt to your capital mix. Your company can trade debt for owner equity or use it to help fund your next capital raise.
Reducing debt – In later phases, your business may experience cash flow issues due to the high cost of debt servicing. This is typical of any highly leveraged company with a large debt-to-equity ratio. Your business will be seen as a risk, which will make adding debt more expensive. Raising more equity or using cash flow to retire debt can help get your company’s capital mix back in line.