Is having debt in your company better than giving away equity?

Seemed like an easy question…I mean after all who needs more debt?

In the FBI Lunch and Learn seminar Debt vs. Equity, FTC Commercial Corp. President Ken Wengrod carefully explained the advantages and disadvantages of both financing methods.

My takeaway…. Giving someone equity in your business in exchange for financing is in essence making them a partner in your business. They’ll be concerned with the in’s and outs and have certain rights to your business and records that someone simply giving you a loan won’t necessarily have. They lose big when you lose big. They win big when you win big. This can be a very good or a very bad thing depending on who your equity partner is and what besides raw capital they are actually contributing to the business.

On the other hand, taking a loan from a person or entity is very different. They get their money back on a certain timetable no matter what. You do good…they get their investment and interest back…you do bad they are entitled to get their investment and interest back. It’s a lot more “hands off.” Again this can be a good or a bad situation. Especially bad if you do bad… Get it?

The main point….It doesn’t pay to make financial assumptions. In fact it does quite the opposite.

It’s important to understand what you need from both a human resources and financial perspective before making major financial decisions. Choosing debt vs. equity financing is too important to in any way be a caviler decision.

This crucial choice is an instance when working with a savvy financial professional could be worth it’s weight in gold….literally.