Equity or debt? What’s the difference – and do you need to choose one or the other?
Business owners can take advantage of an ever increasing variety of financing resources, initially broken into two categories, equity or debt.
“Debt” involves borrowing money, which will need to be repaid, plus interest. In contrast, “equity” involves raising money by selling interests in the company.
Equity or debt – your first decision?
Historically, advisers have tended to steer business owners in one direction or the other, but with the increasing number of options available, many financing options are now available, and so it’s worth shopping around.
Whereas in the past, you may have started by deciding on whether you might be able to access equity or debt financing, and your attitude to risk, and only then reviewing your options, there’s now an easier way to match your business and finance needs.
Equity investment is usually appropriate when a business is considering significant future growth – and this is typically a riskier decision. However, most equity finance solutions, as well as requiring then business owners to part with a share of the business, will bring many benefits in terms of the advice, connections and support from the new investors.
In contrast, decisions around debt may be made at any point, to support cash flow and immediate business needs as well as future plans. When taking on debt, business owners need to be certain that they will be in a cash position to repay the capital and to make interest payments as these become due.
In many business scenarios, a business will have both equity and debt finance in place concurrently, and the two are not mutually exclusive.
The role of the Business Finance Guide
The Business Finance Guide includes a simple tool – Your Finance Journey – that allows you to select the stage that your business is at currently, and your most important financing need.
The tool will then show you the most common forms of finance that might be suitable, with links to read more within the guide itself – or to visit partner and provider sites with more in-depth information on the solution, and links to finance providers.
Watch our video
If you’d like to learn more about choosing between equity or debt financing options, and the options available to a business like yours, watch the video below, where Keith Morgan, CEO of the British Business Bank, explains this in greater depth.
To find out more about choosing equity or debt, you can seek advice, or visit our detailed page on knowing your options – equity finance, and knowing your options – debt finance.