Advantages of Debt Financing

3 May    Blog

Ownership Stays With You
If you have followed the TV show Shark Tank, then you’re familiar with the haggling process after the business owner’s pitch, in which investors offer (and adjust their offers) for upfront capital in exchange for equity (check out a sample deal negotiation with inflatable pad manufacturer, Windcatcher).

While the Windcatcher owner was lucky enough to receive a deal with a lower equity stake than he was willing to give up, he still has to part ways with 5% ownership in his company. When seeking equity financing, other business owners may not be as lucky and have to give up a 10%, 15%, or even 20% stake of their company for an investor to be willing to fork out cash.

With debt financing, you don’t have to give out a stake in your company. Under certain circumstances, you may have to use a piece of machinery, vehicle, or very liquid accounts receivable as a collateral for a loan, but you only would have to give up ownership of that collateral if you were to default on the loan. Ownership of your company stays with you.

Current Management Retains Full Control
With company ownership comes control over management decisions. Depending on how much ownership you give up to third parties in exchange of equity financing, you’ll find yourself being less nimble to make decisions on your own. You often will have to seek approval for a mutually agreed list of items, ranging from hiring new personnel to selecting vendors. Virtually all equity investors seek some level of authority in the decision making process of companies that they invest in.

On the other hand, a lender has no say in how you run your small business. They may still want to take a look at your financial statements to perform a cash flow analysis, but they won’t have to approve on your purchases of supplies or hiring decisions. As long as you meet your scheduled payment plan on time, they’ll be happy to let you run your business as you wish.

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