The Advantages of Debt over Equity Finance

Does your business need to raise funds? Whether you’re looking to take advantage of new opportunities or meet existing commitments, there’s a wide range of options available to suit every stage of your business journey.

The two main sources of finance for businesses are debt and equity. Equity finance is raised by selling a share of your business to an investor, whereas debt finance entails borrowing money and repaying it with interest.

Which funding solution may be right for your business depends on several factors such as how much you want to raise and how quickly you need it, whether you’re looking for a short-term cash flow boost or to fund long-term growth, and what security if any you have to offer to lenders.

Debt and equity both offer unique advantages. For example, equity investors may be able to contribute not just capital but also new skills and contacts to your business, whereas opting for debt instead allows you to retain your independence.

Each has potential drawbacks too. If you decide to borrow funds, then the repayments must be factored into your cash flow planning. And if you’re planning to raise equity, then you should be aware that this can be a very long and time-consuming journey compared to arranging a loan.

In today’s unique business environment, there are some added potential advantages to choosing debt over equity. For one thing, business valuations may be temporarily depressed as a result of negative impacts of the Covid-19 pandemic, and taking on investors could mean having to sell a share of your business for less than the true worth of its long-term potential.

And another important consideration is that with interest rates at historic lows, borrowing has never been cheaper than it is for businesses today.

If you decide on debt instead of equity, then you can select from a very wide range of loan types. Apart from the traditional financial institutions, the market for SME lending is also serviced by agile non-bank lenders. Some specialise in working with businesses to provide fast, easy-to-access, digitally driven services that might be a better fit for you than conventional bank products.

SME debt finance options include:

• Bank loans (term loans): You borrow a fixed sum and repay it over an agreed term.
• Overdrafts / lines of credit: Your financier approves a credit limit, and charges you interest on your outstanding balance.
• Business credit cards: Can be used for a range of business purchases and generally offer an interest-free period, although rates thereafter may be high.
• Equipment finance / leasing: Helps a business quickly acquire equipment such as machinery or vehicles, with the lender setting a repayment schedule.
• Export finance: Provides funding against invoices raised on overseas customers to solve cash flow gaps when a business is exporting.
• Floorplan finance: Enables businesses that sell equipment or vehicles to purchase inventory to stock their shop or showroom floor.
• Invoice (debtor) finance: A lender provides cash advances, which are secured by outstanding invoices.
• Merchant cash advance: Suited to retailers, this method accepts credit or debit card receipts as payment, with future sales supporting repayments.
• Trade finance: Provides importers with funding which allows them to pay a supplier before the goods are received.

Carefully considering your funding needs and then choosing the right solution for you can save you time and money. If you’re not sure what’s best for you, consider asking your accountant or financial advisor for advice.

If your business needs to raise funds, should you choose debt or equity? There are pros and cons to both, but in today’s Covid-impacted business environment there are some added good reasons for opting to borrow funds rather than the alternative of bringing in new investors.

Why Xpress Business Loans?

We understand business owners are passionate about their business which is why we look beyond just ticking boxes. All our lender partners have an open-minded approach to credit and when assessing applications look for ways to approve deals, not decline them.

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