The essentials of debt and equity financing.
By Marty McGhie
Growing your business is a challenge that all owners and managers face regularly. While there are several actions you can take to help accomplish this, here we’ll focus on the financial requirements of growth and discuss some of the challenges of obtaining capital.
Simply put, there are two ways to obtain money for your business: debt or equity. Yes, you have several options for the type of debt you may secure, and there are multiple scenarios for infusing equity into your company. At the end of the day, however, it will come down to either debt or equity. Let’s examine a few of the pros and cons of each type.
Securing capital via debt
Debt financing to obtain capital required for the growth of your business usually will be associated with the expansion of property, buildings, or equipment. Additional debt may also be used to finance or restructure some of the less favorable debt on your balance sheet or perhaps help even out your cash flow. When securing capital via debt financing, you have a few different options:
* Lease financing: Leasing is one of the more traditional ways to obtain financing for equipment, and numerous companies specialize in providing money through a variety of leasing programs. With equipment in our industry, these types of leases are usually paid out over 3 to 5 years or as close to the economic life as possible. A lease typically finances the entire amount of the equipment, leaving no residual value or a $1 buyout at the end of the lease.
The main advantage of these types of leases is that it is often easier to secure financing if your credit isn’t the greatest. Depending upon your banking relationships, the rates may sometimes be a little better. Leasing companies can also be a little more lenient on requirements such as personal guarantees.
One of the primary disadvantages of a traditional lease, however, is the lack of flexibility. While traditional financing agreements may have clauses allowing prepayments of outstanding balances, balloon payments, refinance terms and other options, leases typically won’t allow such terms. For example, if you wish to sell a piece of equipment with an outstanding balance, you’ll usually end up paying the full principle balance as well as all interest due through the remainder of the lease.