Friday, October 28, 2011

When to Use Debt vs. Equity

In general, when you do not have a steady source of cash and you are a rapidly growing business, I strongly recommend you keep your debt to a minimum. Why? There is no consistent source of cash flow to make interest or principal and interest payments. Therefore, equity is better for start-ups and  for rapidly expanding companies. It is true, of course, that with equity you end up paying out more if you grow and paying out heaps more if you grow significantly. But what’s better? 100% of $2 million? or 30% of $20 million?

Debt_or_equity

(The answer: the latter. $6 million is definitely better than $2 million!)  The  overall objective for any business seeking startup or expansion capital is to bring in the most funds while retaining the greatest ownership percentage. Only dilute as it makes sense.

To help you better understand, let me provide you with an overview of debt and equity.

To read the rest of the article, go to Debt vs. Equity?



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