Picking Your Poison2:48 with Pasan Premaratne
Now that we know the pros and cons of both equity and debt financing, let's look at when each type of financing works best for us.
So we have two choices when we need some extra capital to expand our businesses. 0:00 How do we choose? 0:04 Let's consider the advantages and disadvantages together. 0:06 With equity financing, there is a fair amount of advantages. 0:09 You don't [SOUND] have to pay back the money. 0:13 This is a big deal. 0:14 You're not taking on the same amount of risk as if you were borrowing the money. 0:16 Most [SOUND] investors give you the money with long-term expectations, so 0:19 you can put that money to good use without worrying about 0:23 generating profit immediately. 0:27 The profits [SOUND] generated with this money won't go towards paying off a loan, 0:28 another plus. 0:33 You have money in the bank. 0:33 Finally, if your [SOUND] company fails, 0:35 you are in no obligation to pay off a loan. 0:38 That's a risk the investors take when giving you their money. 0:40 However, equity financing comes with strings attached, so to speak. 0:44 [SOUND] The investors will want a piece of your company and 0:47 a share of the profits in exchange for money. 0:50 Depending on [SOUND] how much control you've given away, 0:53 you may have to run decisions, even routine ones, by your investors. 0:56 [SOUND] Finally, raising equity financing is by no means easy. 0:59 There's a significant amount of time involved. 1:03 There's paperwork and 1:06 cost, and you have to take care to find the right investor for you. 1:07 Then there's debt financing. 1:12 With debt financing, there are no [SOUND] strings attached. 1:14 The bank or some lending institution generally wants to know what you plan on 1:16 doing with the money, but they can't say how you run your business. 1:20 It's a bit [SOUND] more straightforward as well. 1:24 You know the amount you have to pay back, including interest, and you can plan for 1:26 that so that your business spends accordingly. 1:30 Once the money is [SOUND] paid back, the business relationship ends. 1:33 It all sounds good, but 1:37 unfortunately, [SOUND] the money must be paid back on time, so 1:38 you will have to generate revenue with the loan and put a portion of it away. 1:42 Too much [SOUND] equity isn't a bad thing on paper, but too much debt and 1:47 you will be seen as risky to lend to and risky to invest in, so 1:51 you have to be careful about how much you borrow. 1:54 Because [SOUND] you have to pay back the loan, 1:57 company growth might be limited during that period. 1:59 And finally, in case of [SOUND] bankruptcy, 2:02 you can't just walk away from the situation like you could with equity. 2:04 Lenders can seize your assets and oftentimes, especially if you're a young 2:08 company, you may have to personally guarantee and pay back the loan. 2:12 If retaining control of your company is important to you and 2:17 you are sufficiently sure that you have the cash flow to repay the loan, 2:21 then debt financing will work best for you. 2:24 However, if you need the money for long-term growth and 2:27 need to invest all of it in activities that won't immediately generate revenue, 2:31 equity financing is probably your best bet. 2:35 You will have to find a balance of control versus cash flow that works best for you. 2:38 It's also perfectly okay to use a mixture of both types of 2:42 financing to field your company. 2:45
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