Blog #2: Debt vs Equity: It’s No Contest!

I have been involved in a lot of business finance transactions so now when someone says, “I’m looking for investors” I cringe and try not to say, “don’t do it”. I have seen too many good people with a good business unable to make the best decision at the right time for their business. Once a piece of Equity is sold then full control of the business begins to erode.

Not only can Equity financing be costly in terms of control, but it absorbs a huge amount of time. Unfortunately it also has the potential to stir up deep emotions and affect personal relationships. Friends, family, and angels can suddenly become sharks, dragons, and vultures.

Maybe the best thing about Debt financing is to make it go away all you have to do is pay it off at a price that everybody has already agreed to. The lender must accept payment and the borrower can choose to never borrow from that same lender again. Best of all, financial contracts do not change their mind.

Some business owners compare Debt financing options by APR and I advise against that. It is more important to make sure that the funds provided solve the problem, that it is affordable and can be easily paid off. I suggest putting more effort into the timing, leverage and what it adds to the bottom line.

I can no longer watch “reality” TV shows where wealthy “investors” compete for pieces of somebodies hard earned business. Like most investors they are looking for a great business with low sales and profits so they can get in early and earn many times their investment. I can’t help but shout at the screen when I can tell that financing with Debt for a little bit longer would make a HUGE difference!

The battle of Debt vs Equity will continue forever because technically speaking there are only two ways to finance a business. I like to think there is a third way, I call it DIY Financing ; “make a sale, earn a profit, make more sales, keep money in the business”. Of course, the journey may then take longer, be more difficult and less glamorous but in end FAR MORE rewarding.