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Debt vs. Equity Financing Pros and Cons

Debt vs. Equity Financing Pros and Cons

Whether you are a startup company looking to get off the ground, or an established business looking to push to new heights, you will need outside capital. Without an injection of capital, you likely will not be able to expand your company. For most businesses, there are two primary ways of obtaining this capital: debt and equity. Let’s explore debt vs. equity financing and the pros and cons of each.

Debt Financing

In terms of obtaining capital, debt financing is what people generally think of. This involves an entity such as a bank, a government, or another business, providing capital that will be repaid with interest. Debt financing encapsulates business credit cards, business loans from the government, and bank loans.

Debt financing has some significant advantages:

  • Maintain sole ownership of your business: This is arguably the most significant benefit of debt financing. You will probably have to offer some form of collateral, but you will not have to give up any control or ownership.
  • Keep future profits: When you grow your business, the accounts receivable to the bank does not increase. Regardless of your business’ growth, your debt will only increase based on the interest rate.
  • Flexibility: Another important aspect of debt financing is the flexibility it provides you. Once you obtain the line of credit or the loan, there aren’t restrictions concerning what you can spend the money on. This allows you to use the money as growth capital on whatever you see fit.

While these advantages are important, there are also some important disadvantages to consider.

  • Requires profitability: This is true for all options outside of personal credit cards. Banks and the government do not want to assume any risk in financing small businesses, so businesses that have yet to prove profitable usually cannot obtain these types of loans.
  • Complicated process: The process of obtaining a loan from the bank or government is extremely time-consuming because of the significant vetting involved. Once you obtain the money, the loan repayment plan can be confusing as well.

Equity Financing

While debt financing involves receiving capital that will be paid back later, equity financing is when a company receives capital in exchange for equity (or ownership) in their company. With this arrangement, you do not have to pay the money back, since the payment is partial ownership. Depending on the needs of the company and requirements of the investors, a company can give up a small portion of their equity or all of their equity in a single transaction.

Equity investors typically want to invest in companies that have significant profit potential so that their shares increase in worth. However, some equity investors will also invest in older companies that are restructuring or expanding. Angel investors and venture capitalists are the primary sources of equity financing.

Here are some of the most noteworthy advantages of equity financing:

  • Significant capital: Compared to bank loans, equity financing can raise significantly more money for your business to use. This is particularly true for venture capital, where a group of investors collectively partners with your business. Having that increased cash flow allows you to expand to create even more capital.
  • Risk: Most equity financing providers are not concerned with current profitability. Instead, they are interested in the potential for your business plan to produce long-term profits. As a result, venture capitalists and private equity companies seek out young companies with significant potential, which also presents significant risk.
  • Liability: Because venture capitalists are taking at least partial ownership in your company, you are no longer completely responsible in the case that your business fails. As WealthForge puts it, one “advantage of equity financing is that the investor assumes all the risk.”

However, equity financing also has some cons that you need to consider before pursuing it.

  • Lose equity: This is a rather obvious drawback of equity financing, as the whole premise is to give up some equity to receive capital. Even though it is obvious, it’s worth mentioning again. Once you give up all of your equity, it becomes difficult to obtain additional financing further down the line.
  • Lose control: Private equity firms and other equity investors typically provide some mentorship, which is helpful. However, most of these groups will put someone on your board and want a voice in your company. When you and the firm have different ideas about the direction and practices of your company, you may experience a significant conflict. Your vision may no longer direct the company.

What Does Revtek Capital Offer?

At RevTek Capital, we understand the complications and challenges that come with borrowing money. Whether it be a bank loan or another source, every type of loan has its drawbacks. That’s why we’ve simplified the process for tech businesses with recurring revenue.

Our model is quite simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $500,000 a month. The benefits are substantial:

  • We don’t take your equity.
  • We don’t take any control or ownership.
  • Our terms are simple and easy.

If you are looking to raise capital for your startup, choose RevTek. Our experienced team can provide you with the money you need to expand your tech startup. Contact us today to learn more about how we can help your business grow.

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