Debt or Equity which is a Better Decision?

You are a business owner, you need cash. What else is new?

When considering the options, traditional personal financing wisdom always suggests avoiding debt. Does that hold true however for business financing? Surprisingly, debt is often preferable when you are financing your business. Why is that?

First you have to ask yourself why you need the money in the first place. Do you just need cash, or could you benefit from more industry connections or knowledge? Do you actually know someone with cash and these added value benefits of knowledge or connections that would be a good fit as an investor?

Every time you opt for equity investment over debt, you are giving part of your business away. When you use debt, you are keeping your business for yourself. Debts will eventually be paid off. Equity given away will always grow (most likely far more than any interest you pay on your debt) – meaning your portion of the business will shrink. So if you are tempted to raise cash by giving away equity, don’t do it just to get the cash. Make sure the investor brings added value to the table. Do they have key connections to customers you need? Do they have substantial industry knowledge or insight you lack? Make sure the intangible value of what they bring to the table far exceeds the cost of any interest or other fees you would pay on the debt.

If you are looking for cash only, and maybe also need some help with the administration in your office, there may be a number of options available to you, so give us a call to find a good fit for your situation.

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