Financing the Venture: Debt v. Equity
Debt
Debt is borrowed money. It represents an agreement for repayment under a schedule and
interest rate.
Advantage:
•
Debt is usually less expensive than equity
•
Maintain ownership of the business
Disadvantage:
•
Debt often requires collateral and the regular payments require discipline
•
Often requires personal guarantee of principals
Equity
Equity represents an ownership stake in the business.
Advantage:
•
No regular schedule of repayment; the investors have no legal claim to the
dividends so it is less risky
•
Investors will finance more risky ventures
•
Can raise larger amounts of money
Disadvantage:
•
Equity is usually more expensive
•
Part of the control and ownership is surrendered
If the business is successful in the long run, you have reduced the
returns you would have received
Sources of financing:
•
Founders the founders of the business
-
o Personal funds/Investments
1
•
o
Credit cards
o
Home equity
o
Unsecured loan
Individuals - family, friends etc.
o Loans
o Equity investments
•
Banks - personal loan with guarantees and collateral
•
Government Programs
o
•
Micro-loan Programs
o
•
•
Targeted towards groups and make riskier loans than banks
Commercial Finance Companies
o Give loans for equipment, inventory, and accounts receivables
o
•
Help overcome objections a banker may have with request
Usually rates are 2% - 6% higher than banks
Angels - wealthy individuals that are interested in the high risk/return opportunities
o
Unsecured loans
o
Equity investment
Venture Capital - outside equity from professionally managed pools of investor money
usually over $750,000 in investment and very hard to secure
•
Preferred stock
•
Convertible debenture
•
Stock with warrants
2
-
Financing Strategy:
• Get the big picture before you start
• Identify and evaluate the possible sources
• Have enough ownership to keep you motivated
• Tie the financing plan to the business development plan
• Limit cold calls use a network and introductions
-
• Have a strategic use for each financing
Non-Financing sources:
• Lease/Purchase
• Extend terms for supplies
• Supplier financing
• Swap or trade services
3