DEBT OR EQUITY- WHICH ONE IS BETTER FOR

YOUR BUSINESS?
NAME-AVANI SHAH

ROLL NO-PGDMRBA019

Introduction:
Debt finance is rarely considered by CEOs of early-stage firms when seeking growth funding.
Venture capital has a bigger market share, and many entrepreneurs are wary about taking money
that comes with an interest rate or a repayment cap.

They aren't supposed to be. It's not the same as maxing out your credit cards to support your
product development if you're financing your healthy growing firm with debt. You have paying
consumers, and maybe a few businesses. You've made money. You (ideally) have a bookkeeping
department. This infrastructure makes it simple to account for debt: you know what you owe
ahead of time and can prepare accordingly.

Furthermore, debt financing may have its own set of advantages. Here are five reasons why you
shouldn't be afraid to borrow money to fund your business.

1. In the long run, debt is cheaper than equity

VC is often misunderstood by entrepreneurs as "free money." It's not the case. In reality,
debt is nearly always the less expensive alternative when scaling and exiting.

Consider it this way: If you accept a $1 million loan for five years at 20% APR, that $1
million will cost you $1.6 million by the time you pay it off. However, if you accept $1
million from a VC at a $5 million valuation (selling 20% of your shares) and
subsequently get purchased for $15 million, the VCs get $3 million.The same amount of
cash is available at the same moment, but the lender offers you $1 million for $1.6
million and the venture capitalist sells you $1 million for $3 million.

2. Debt gives you tax benefits:

Assuming your business is profitable, debt financing offers a few tax advantages that
equity financing does not.
If your company utilizes accrual accounting, the interest component of your payment will
be deducted from your taxable net income on your profit and loss statement. This suggests
that the true cost of borrowing is lower than the reported interest rate. In a nutshell, the US
government assists you in lowering the cost of your loan.
3. A lender isn’t going to tell you how to run your business
Taking on equity investors entails putting them on your board of directors. It also entails
adhering to their vision of how your firm should develop. If you don't like it, be wary: they
have the power to limit your authority over the firm you founded, or, in the worst-case
situation, to fire you.
Lenders are unconcerned as long as you're making your payments on time and in a position
to do so in the future. There are no board seats, hence there is no control.

4. For businesses with sticky revenue streams, debt can be very accretive
If you're a startup with regular income sources (such as SaaS or subscription-based
services), a little bit of debt can actually help you grow your business. You'll be able to
make a few important recruits with the extra funds. If you recruit the right people, they'll
build out features and sales programs for you, and you'll see a return on investment that's
far greater than their salary.

5. More time to actually run your company

Coffee meetings, pitches, and phone conversations often take six to nine months to raise a
VC round. Debt financing is usually significantly faster than equity funding. Debt also
saves you time once you have it. Lenders don't need to know about every choice you make,
and board meetings aren't required. They will not need to consult you on every new
employee or plan.

Conclusion:
What you can and can't accomplish with your business in the future is determined by the
funding choice you choose now. It's critical to be aware of all your funding alternatives in
the early stages of your business—after launch and before gaining popularity.