Debt Verses Equity Financing

One of my readers has recently posed the question “in what cases should a manager look at equity verses debt financing”.  First let’s make sure we understand the difference between the two.

Debt financing is exactly what it says.  Incurring debt (taking out a loan) to finance the start-up or purchase of a business.  You can also take out a loan to grow or expand a current business.  Debt financing can take on many different forms.  SBA loans/lines, traditional business lines of credit/loans, equipment leasing, etc.  You can also find alternative debt financing through vehicles like credit card advance funding, hard money loans and hedge fund loans just to name a few.

Equity financing typically comes from an angel investor, a venture capital firm or the like.  When a group or individual makes a cash infusion into your business in exchange for an interest in your company, it is an equity investment.