{"id":2780,"date":"2022-03-30T03:17:01","date_gmt":"2022-03-30T02:17:01","guid":{"rendered":"https:\/\/uk.legalvision.com.au\/?p=2780"},"modified":"2026-01-30T11:36:10","modified_gmt":"2026-01-30T11:36:10","slug":"raise-finance-debt-equity","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/raise-finance-debt-equity\/","title":{"rendered":"Should I Raise Finance Through Debt or Equity?"},"content":{"rendered":"\n

Are you a business owner looking to grow your company? Perhaps you have a compelling idea <\/span>andhave taken the first steps to implement<\/span> it, but need money to scale? You probably know there are two ways your business can acquire capital (i.e., money): debt and equity. You also know how these operate. Equity investors give your company money in exchange for acquiring shares of ownership, while debt financiers are typically banks that lend your company money in exchange for repaying the loan plus interest. This article explains key legal and commercial considerations you s<\/span>houldevaluate when deciding <\/span>between\u00a0debt or equity financing.<\/span><\/p>\n\n\n\n

Overview<\/span><\/h2>\n\n\n\n

The critical distinction between equity and debt financing is that an equity investment dilutes your share of ownership in the company. In contrast, a debt investor will charge you interest for the privilege of lending your company money. <\/span><\/p>\n\n\n\n

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In other words, the disadvantage to equity financing is that you lose a portion of ownership in your company and the amount you share in the company’s profits. So, effectively, you will have less control over how you run your business. <\/span><\/p>\n<\/div>\n\n\n\n

Likewise, debt financing requires that your business pay an additional amount of money (interest) in addition to the amount you have borrowed. <\/span><\/p>\n\n\n\n

We will explore the advantages and disadvantages of each in more detail. <\/span><\/p>\n\n\n\n

Cost of Capital<\/span><\/h2>\n\n\n\n

Each kind of financing has its own cost of capital. <\/span><\/p>\n\n\n\n

Equity<\/h3>\n\n\n\n

For equity, your company’s shareholders will be entitled to receive a share of your company’s profits based on the number and type of shares they own. <\/span><\/p>\n\n\n\n

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Speaking practically, equity investors in early-stage businesses tend only to invest in companies if they have preferential rights to dividend payments. Therefore, not only will your company have to turn a profit, but the preferential shareholders will have to be paid in full before you and the company’s other founding shareholders get your share of the profits. <\/span><\/p>\n<\/div>\n\n\n\n

At the same time, because you are only paying your equity investors out of your company’s profits, this may be cheaper than debt financing. <\/span><\/p>\n\n\n\n

Debt <\/h3>\n\n\n\n

For most small and medium-sized businesses, debt financing is almost always conditional on paying interest on top of the amount borrowed. For a debt investor, such as a bank lender, the riskier they perceive the investment, the more interest they charge.<\/span><\/p>\n\n\n\n

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As an example, an overdraft facility may permit you to borrow up to \u00a310,000 with a 10% equivalent annual rate (EAR) assessed each day there is an outstanding balance. However, if you borrow the total amount and it remains outstanding for the year, you will have to pay \u00a31,000.<\/span><\/p>\n<\/div>\n\n\n\n

Therefore, this often means that debt financing is more expensive than equity in practice. <\/span><\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n

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