Debt and Equity

Welcome to this week’s installment on raising capital! Head over to our Youtube channel and take a look at this article from Strategic Capital to learn more.

In this week’s capital raising segment, we want to talk a little bit about two different types of capital, which is basically equity and debt. The one thing all small businesses need is capital to be able to move forward or even get started. So the question came to us this week, can you raise debt and equity at the same time? And the answer is yes, and it’s actually quite common. Sometimes people will do that by using a hybrid interest instrument, which we’ve talked about before, something like a convertible note or other people will have a tandem debt offering that’ll have certain terms, a lot of times they’re short term in nature (two to three years) or a long-term piece, and that debt may have a bit of an equity kicker too. It participates in profits, and at the same time they’ll raise more permanent equity in the form of common or preferred stock, that will have higher returns but also higher risk.

To determine what type of capital you need to raise takes a deep dive into your business model. If you’re already operating and growing, you want to lean towards the debt side, because at the end of the day debt is far less expensive than equity. Equity takes a bigger risk. They’re the last ones to get paid if anything goes wrong, and may never get paid, so equity is always more costly than if you had just gone and borrowed the money either privately or from a bank. Of course, there’s usually risk to the principles, if you go borrow money. It takes a really good experienced analysis to look at your type of business to determine what types of capital to raise.

We mentioned an article about all this at the top, so look at that and/or give us a holler to take a deeper dive.

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