Lendinero's blog on Growing Your Business
From credit cards and credit unions to VCs and IPOs, a dizzying array of financial tools can help entrepreneurs grow their businesses. With so many options, it’s important to pick the best tool for the job. Finance professionals call this “structuring” your business finance, and the right structure can mean the difference between building a monumental company and sinking in the quicksand of debt.
Paper or Plastic?
Whether you need $10 or $1 million, there are only two kinds of money: debt, which is borrowed, and equity, which is traded for ownership of the company. The first step to raising the right kind of money is to decide between debt and equity. Usually, the choice depends on personal preference.
If you are a little bit of the controlling type, “Nobody gets equity”, is the best way to go. Tightly controlling company ownership means you never have to answer to anyone.
“If you’ve got a company with real estate or heavy equipment, and if you’d prefer to pay interest rather than give up ownership, then debt financing is the way to go,” and “Lenders like to see those kinds of assets.”
Purchasing such assets usually involves leases and loans backed by the equipment itself. Many equipment manufacturers offer built-in financing–as is the case with PC leasing, for example–but traditional banks and credit unions are also good sources for loans backed by hard assets. Either way, the term, or duration, of a lease or loan should more or less match the expected life span of the asset backing it.
On the other hand, raising money through equity offers serious advantages to businesses, which could potentially improve your creditworthiness.
Equity financing can come from individual angel investors, traditional venture capital or–most common for growing businesses–mezzanine lenders, who combine equity and debt to purchase a business or fund large growth opportunities.
And therein lies one key to achieving maximum growth for your company: using equity and debt together. Equity provides an asset base that can facilitate bank borrowing. With equity, you can leverage a little further.” Not only is the equity money itself an asset that a bank can use as collateral, but partners and shareholders may use their personal credit scores to enable additional borrowing.
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