You have a unique business and risk tolerance. You need to identify the least dilutive types of capital that fit with your company, goals, and personal preferences. Here are a few rules of thumb for deciding which type of capital to choose:
When does debt make sense?
- If you have a profitable business that only needs a small amount of capital or short-term financing and you have little other debt.
- If you have ample cash flow, a long track record of success and strong visibility into continued future profitability.
- If you need capital to purchase assets that a lender can use as collateral.
- If you are a startup company with limited traction, angel investors are often willing to participate in convertible notes.
When to raise equity?
- If your business has very few fixed assets for a bank to use as collateral.
- If your company has negative or limited cash flow to pay back debt.
- If your business or growth initiative has a high-risk profile (startups and new products).
- If you’re seeking a strategic partner to help with the growth of the business.
When do hybrid models make sense?
A combination of debt and equity is often the right path for businesses of all stages. In these situations, equity is viewed as the lead investment, and debt comes in alongside to provide incremental capital, without further dilution to existing owners. Leveraged buyouts are a common form of this situation.
Seek advice from trusted advisors who understand your business and the capital markets to help you determine the right type of capital to pursue.