Debt and Equity Raises
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As a business grows and seeks to expand, expenses generally increase. Sometimes, the revenue the business is already generating can be used to fund the growth of the business, but often that is not enough.
In those circumstances a capital raising is generally required.
There are two (2) main ways to raise capital:
- Debt raising; and
- Equity raising.
Debt raising
Debt raising is similar to any other type of loan in that money is lent to the business on the basis that it will be paid back on a regular schedule, generally with regular interest payments. Types of debt raising include bank loans, mortgages, over drafts or even credit cards.
Some of the advantages of debt raising include:
- You do not give up any share of your ownership in your business, meaning that you maintain control of the business and its operations;
- There may be tax advantages to taking on debt finance;
- There is more certainty as to the cost and timeframe for repayment of the debt; and
- The repayments do not increase if your business becomes more profitable.
The disadvantages include:
- You need to be sure that you will be able to repay the debt and interest in the terms agreed;
- If you take on too much debt, it can cause problems with your cashflow, particularly if the income of your business is volatile; and
- Commercial lenders may not be prepared to lend you money if they are not confident in your business and its ability to pay back the debt.
Equity raising:
Equity raising is effectively where you sell a share of your business in exchange for funds to grow the business. For an equity raising to be successful, you will have to find people who are confident in the future.
Equity raising can come from family and friends, private investors right up to a public offering by listing your company on the stock market.
The advantages of equity raising include:
- There is generally less impact on the cashflow of your business;
- It is a way of securing funds if you are unable to meet the lending requirements of commercial lenders; and
- An investor may bring valuable knowledge and ideas to your business.
The disadvantages include:
- If you sell the majority of your business, you may lose control of how your business runs;
- Investors can be demanding and take up a lot of your time;
- It can be difficult to value your business; and
- The returns the investor sees are tied to your future profits, meaning that it may turn out to be an expensive way of raising funds if your business becomes more profitable than you anticipated.
If you are considering debt or equity raising, you should seek not only legal advice, but also taxation and financial advice from your accountant and financial planners to ensure that you make the right decision for you and your business.
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