1 00:00:00,480 --> 00:00:04,960 So we have two choices when we need some extra capital to expand our businesses. 2 00:00:04,960 --> 00:00:06,330 How do we choose? 3 00:00:06,330 --> 00:00:09,940 Let's consider the advantages and disadvantages together. 4 00:00:09,940 --> 00:00:13,370 With equity financing, there is a fair amount of advantages. 5 00:00:13,370 --> 00:00:14,915 You don't [SOUND] have to pay back the money. 6 00:00:14,915 --> 00:00:16,110 This is a big deal. 7 00:00:16,110 --> 00:00:19,732 You're not taking on the same amount of risk as if you were borrowing the money. 8 00:00:19,732 --> 00:00:23,907 Most [SOUND] investors give you the money with long-term expectations, so 9 00:00:23,907 --> 00:00:27,021 you can put that money to good use without worrying about 10 00:00:27,021 --> 00:00:28,955 generating profit immediately. 11 00:00:28,955 --> 00:00:33,121 The profits [SOUND] generated with this money won't go towards paying off a loan, 12 00:00:33,121 --> 00:00:33,923 another plus. 13 00:00:33,923 --> 00:00:35,921 You have money in the bank. 14 00:00:35,921 --> 00:00:38,048 Finally, if your [SOUND] company fails, 15 00:00:38,048 --> 00:00:40,247 you are in no obligation to pay off a loan. 16 00:00:40,247 --> 00:00:42,960 That's a risk the investors take when giving you their money. 17 00:00:44,040 --> 00:00:47,815 However, equity financing comes with strings attached, so to speak. 18 00:00:47,815 --> 00:00:50,929 [SOUND] The investors will want a piece of your company and 19 00:00:50,929 --> 00:00:53,454 a share of the profits in exchange for money. 20 00:00:53,454 --> 00:00:56,246 Depending on [SOUND] how much control you've given away, 21 00:00:56,246 --> 00:00:59,747 you may have to run decisions, even routine ones, by your investors. 22 00:00:59,747 --> 00:01:03,626 [SOUND] Finally, raising equity financing is by no means easy. 23 00:01:03,626 --> 00:01:06,420 There's a significant amount of time involved. 24 00:01:06,420 --> 00:01:07,510 There's paperwork and 25 00:01:07,510 --> 00:01:11,300 cost, and you have to take care to find the right investor for you. 26 00:01:12,480 --> 00:01:14,110 Then there's debt financing. 27 00:01:14,110 --> 00:01:16,865 With debt financing, there are no [SOUND] strings attached. 28 00:01:16,865 --> 00:01:20,670 The bank or some lending institution generally wants to know what you plan on 29 00:01:20,670 --> 00:01:24,900 doing with the money, but they can't say how you run your business. 30 00:01:24,900 --> 00:01:26,371 It's a bit [SOUND] more straightforward as well. 31 00:01:26,371 --> 00:01:30,166 You know the amount you have to pay back, including interest, and you can plan for 32 00:01:30,166 --> 00:01:32,430 that so that your business spends accordingly. 33 00:01:33,640 --> 00:01:37,087 Once the money is [SOUND] paid back, the business relationship ends. 34 00:01:37,087 --> 00:01:38,567 It all sounds good, but 35 00:01:38,567 --> 00:01:42,415 unfortunately, [SOUND] the money must be paid back on time, so 36 00:01:42,415 --> 00:01:47,084 you will have to generate revenue with the loan and put a portion of it away. 37 00:01:47,084 --> 00:01:51,080 Too much [SOUND] equity isn't a bad thing on paper, but too much debt and 38 00:01:51,080 --> 00:01:54,464 you will be seen as risky to lend to and risky to invest in, so 39 00:01:54,464 --> 00:01:57,280 you have to be careful about how much you borrow. 40 00:01:57,280 --> 00:01:59,665 Because [SOUND] you have to pay back the loan, 41 00:01:59,665 --> 00:02:02,577 company growth might be limited during that period. 42 00:02:02,577 --> 00:02:04,962 And finally, in case of [SOUND] bankruptcy, 43 00:02:04,962 --> 00:02:08,904 you can't just walk away from the situation like you could with equity. 44 00:02:08,904 --> 00:02:12,791 Lenders can seize your assets and oftentimes, especially if you're a young 45 00:02:12,791 --> 00:02:16,340 company, you may have to personally guarantee and pay back the loan. 46 00:02:17,710 --> 00:02:21,070 If retaining control of your company is important to you and 47 00:02:21,070 --> 00:02:24,940 you are sufficiently sure that you have the cash flow to repay the loan, 48 00:02:24,940 --> 00:02:27,920 then debt financing will work best for you. 49 00:02:27,920 --> 00:02:31,010 However, if you need the money for long-term growth and 50 00:02:31,010 --> 00:02:35,240 need to invest all of it in activities that won't immediately generate revenue, 51 00:02:35,240 --> 00:02:38,062 equity financing is probably your best bet. 52 00:02:38,062 --> 00:02:42,730 You will have to find a balance of control versus cash flow that works best for you. 53 00:02:42,730 --> 00:02:45,730 It's also perfectly okay to use a mixture of both types of 54 00:02:45,730 --> 00:02:47,221 financing to field your company.