Lessons Learned: Debt vs. Equity - Which is Better?
Rick Dennen : Hi, I'm Rick Dennen, founder and CEO of Oak Street Funding and First Franchise Capital. Welcome back to vlog two of a five part series entitled Business Financing. Vlog one covered startup equity and considerations for startups. Regardless of whether you're a startup company or a mature business, if you can support debt, then you have options between debt and equity, which is good. When I started my company, I took on both debt and equity in order to maximize the return to shareholders. Some people don't want to share the equity, and others may be completely adverse to debt. Whichever you choose, there are pros and cons to each, and here are a few to consider. The pros of taking on debt is that there's no loss of control of your business and the ability to leverage other people's money, which will result in a greater return on investment. The loan interest may also be tax deductible for you. The cons of taking on debt, on the other hand, are that many banks require tangible assets and personal guarantees to collateralize the loans. You are responsible personally for ensuring that this debt gets paid off. And if the debt defaults, you could lose and your spouse could lose personal assets. On the equity side, the pros are that investors assume the risks. There will be more cash available for growth and working capital. There are no interest payments. And you will potentially gain a strategic partner and advisor along the way. The cons of giving up equity include some loss of control of your business. Your earnings will be shared or diluted, and the process can be time consuming and have greater costs along the way. As I stated in the beginning, I had a combination of debt and equity in this business. We had a multitude of banks that we took on during this process, and again, some were better partners than others. So the key message in this vlog is that debt partners are almost as important as equity partners. Choose wisely. Thank you so much for watching, and come back to our third vlog where we will cover loan structuring.
The second part of the 5-part series with Rick Dennen discusses the positives and negatives of debt and equity.