Chase Debt, Not Equity
For many businesses, securing financing is a key component of their growth strategy. The decision to raise funds through debt or equity financing is a crucial one, as each option offers unique advantages and disadvantages. In this post, we will explore the benefits and reasons why businesses should consider securing debt financing over equity financing.
One of the main benefits of debt financing is that it is readily available. Lenders are typically more willing to provide funding to businesses that have a proven track record and steady cash flows. Debt financing is also based on empirical information, such as credit scores and financial statements, making it a more objective process compared to equity financing, which can be more subjective and difficult to procure. With debt financing, businesses can obtain the funds they need to invest in growth without having to give up ownership or control.
Small businesses that have been operating for a few years and have hit a bottleneck constraint for additional capital should consider small business funding to meet their capital requirements. Many times, companies that have little to no debt and have received an early-stage seed investment are likely to qualify for a working capital business loan. This type of loan can help businesses meet their short-term cash flow needs, such as inventory purchases or payroll expenses.
Another advantage of debt financing is that it can be used for specific purposes, such as expansion into brick-and-mortar for leasehold improvements or equipment financing. This can help businesses focus on their growth goals while still maintaining control over their operations.
Data shows that in 2021 and 2022, more businesses received debt funding compared to equity funding. This indicates that more businesses are realizing the benefits of debt financing and are turning to lenders to obtain the funds they need to grow. Furthermore, with the upcoming US economic cycle change, equity and angel investors have adopted stricter underwriting guidelines, making debt financing a more attractive option for businesses.
Debt financing is underwritten heavily on past and current performance, which can make it easier for businesses to secure funding. In contrast, equity financing is underwritten on future performance and the resumes of the management team, which can be more difficult to predict and evaluate. By focusing on past performance and steady cash flows, lenders can provide businesses with the funding they need to achieve their growth objectives.
In conclusion, debt financing can be an attractive option for businesses looking to raise funds. With readily available funding and an objective underwriting process, businesses can secure the capital they need to invest in growth without giving up ownership or control. By considering a small business loan for financing working capital, expansion, inventory and equipment financing, and payroll expenses, businesses can meet their short-term cash flow needs and focus on achieving their long-term goals.
Need working capital? Business loan program details are available on the Business Financing Solutions page.
