Perry Abbonizio: Debt vs. Equity Financing: Which Is Better for a Business?

Understanding the Pros and Cons of Debt vs. Equity Financing for Small Business

Debt and equity financing can both fund your business but which
one is best? Your business needs extra capital should you take out a business loan or look for an investor? Figuring out how to finance your business is an important decision that can have long term consequences, so which is better? Debt or equity?

1. What are the main pros and cons of debt financing?

The pros of debt financing are that you retain control of you company with the lending institution having no say on how you operate your business, you can take advantage of tax deductible interest, and you know exactly what you have to pay and when.

However, the setbacks to debt financing are that you have to have a good enough credit rating to receive the financing, have the financial discipline and generate the income to make the payments, and provide the collateral so the lender can offset risk.

2. What are the pros and cons of equity financing?

There are three advantages to equity financing.

1. There is no loan to repay so there isn’t the monthly worry as to whether or not you’ll be able to make a payment and hurt your credit score if you miss it.
2. Your credit history to secure the financing doesn’t come into play.
3. You’ll now have partners who are invested in the business with the ability to learn and grow with them.

With equity financing the business owners usually has to share profits with their new partner and could lose some decision-making ability as well. However, a good equity partner will share ownership and continue to allow the company to grow with your goals and visions in mind.

3. Is one better than the other? In what scenarios would it make sense to choose debt vs equity or vice versa?

One is not necessarily better than the other. Business owners have to evaluate their situation and make the choice that is best for their company. Debt financing is ideal for a company that has a regular stream of income and is established in the marketplace with an owner that wants to remain the only decision maker, while equity financing is probably a better choice for a start-up business that hasn’t established itself yet, could use a partner, and may not have the solid footing to get a lender to take the risk.

4. How can business owners decide which one is right for them?

While it is natural for the business owners to be hesitant at the prospect of borrowing and allowing more credit to pile up or giving away equity in their business, you must actually weigh your pros and cons before deciding between a loan or equity financing. Look at the bigger picture and analyze whether or not it is a smart decision to turn down a massive business opportunity just for the sake of not having to deal with loans and interest or partnering with an equity firm.

Perry Abbonizio

Perry Abbonizio is the Founder and President at New Field ventures a private equity and consulting firm. Perry Abbonizio has over 40 years of finance, consulting and private equity experience. Prior to Founding New Field, Abbonizio worked in investment banking at Morgan Stanley, Wells Fargo, Oppenheimer and Salomon Smith Barney where he drove investments in healthcare, tech and technology sectors.

Mr. Abbonizio has been profiled in numerous financial publications discussing financial planning, Investment strategy, long term investments, wealth management and is considered an expert in his field.