Tip of the Month
The “Shark Tank” phenomenon seems like a glamorous way to secure financing, but in reality, equity financing can create sacrifices compared to financing the business with a loan.
Needing money is not a bad thing. Cash needs can vary throughout the normal lifecycle of a business. A cash infusion is often normal for a typical growing venture. Savvy business owners understand and use both debt and equity financing to grow a business.
Debt versus equity tradeoffs require at a minimum, an understanding of the following:
- How soon do you need the money? Sometimes, a good credit score (above 750) can secure you a bank loan in days.
- How much do you need? Sometimes, working capital needs in the form of a line-or-credit will do the job to help you get over a hurdle.
- Loan covenants. Loan covenants required by equity investors can restrict you from running your business day to day. Equity shares could be transferred if the equity partner passes away (you may be in business with someone you don’t know).
- Preferred vs. Common Stock. Common stock puts you on equal footing with an investor and preferred stock does not. Preferred stock could require giving some investors access to more of your profits than you might think.
- Liquidation preference. What is the order of payment and how do various equity investors get paid off.
Be sure to consult with a qualified business professional or attorney for much more on this topic.