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EQUITY CAPITAL OR DEBT? LOOK AT PRIORITIES

RAISING CAPITAL

In order for a new venture to be successful, it must, of course, have the financial resources necessary to operate the business. In fact, financial resources are as essential to business success as good people and the right products.

However, financing also encompasses more than merely obtaining money. It should involve realistic plans for the initial establishment of the business as well as cash-flow plans that coincide with a good business plan.

Since your new firm may not spin off positive cash flows immediately, these shortfalls in cash should be carefully included in the up-front financing requirements. After all, cash pays the bills, not income.

TO RAISE OR NOT TO RAISE

Don't try to raise money just for the sake of raising money. Some people feel like they don't have a "real business" unless they borrow some money or get people to invest in their company.

If you can avoid borrowing or bringing in investors, you are better off. By not borrowing, whenever possible, you are reserving future profits for yourself rather than sending it off to the loan collection department of a bank or the personal account of a well-to-do investor.

Unfortunately, however, most businesses cannot avoid doing one or the other. With that being the case, you need to know where to go and what kinds of financing to get.

DEBT OR EQUITY

Unless you can talk someone into giving you money (and if you can do that, you probably don't need to go into business), you must decide whether you want debt or equity capital.

When you borrow money, it is called debt. With debt, you are required to pay back the money by a certain date and under certain terms, just like those monthly credit card bills or car payments. With equity financing, you are actually giving up part ownership of your company. You do not make any sort of set payments to the investors - they just share in the profits that your business generates.

As you might have guessed, there are advantages and disadvantages to each type of financing. In terms of debt financing, the most significant advantages is that you do not give up any ownership of the company.

Many entrepreneurs relinquish significant portions of their company at startup for relatively small investments. These people

may regret having given up equity if the company prospers and subsequently is worth a lot of money. Once you give up ownership, the only way to get it back is to buy it.

Finally, you must remember that with debt, you run the company (although some bankers would disagree). If you choose equity, there is someone else out there who has a say in how to run what was once "your" company.

Although the reasons might not be as clear, there are some significant advantages to equity financing that outweigh the loss of own-er-ship interest.

First, it is less risky to business. Since equity financing does not require repayment, you don't have the same pressure at the end of the month when the bills are due (wouldn't that be nice in our personal finances)?

Second, equity investors are willing to invest money in riskier business situations. Although you might think that your idea is a "sure-fire" money maker, others might not. Without past experience or a proven track record, this can translate into a lack of funds.

Third, you can generally raise larger amounts of money through equity investments than through debt (with certain exceptions, of course).

Finally, in terms of the loss of ownership, it must be mentioned that this is not always bad. After all, 50 percent of a business worth $1 million is a lot more attractive to most people than 100 percent of a business worth $200,000.

FOCUS ON YOUR OWN NEEDS AND PRIORITIES

Whether, you choose debt or equity will depend upon you and the nature of your business. In many situations, creative control is more important than the availability of large sums of money. So, before you commit to one source of funds or another, take a hard look at the priorities and objectives of your business.