Decision Crossroads

Control, Risk and Ownership: The key issues when deciding how to raise finance for your business

The key points Business Owners and Directors must consider when deciding whether to raise finance through debt and/or equity, especially around ownership, control and risk.

There are many reasons why your business might need to raise finance, and the good news is that there are many funding routes available to you.

The finance option you eventually choose will depend on your specific needs and circumstances, but it will also depend on a few other key considerations, especially around ownership, control and risk and your desire to maintain, increase or reduce each of these factors.

In this short article, taken from our guide “How to Raise Finance for Your Business” we outline the key points every business owner and Director must consider when deciding how to raise finance.

Debt or Equity Financing?

The options for raising finance for a business typically fall into two main categories: Debt Financing or Equity Financing.

Debt financing involves borrowing money from a lender, typically a bank or another financial institution, with the intention of repaying the loan back with interest over a specified period of time. The lender will usually have a legal claim on the borrower’s assets in the event that the loan cannot be repaid and is defaulted.

Equity financing involves selling shares of your company to investors in exchange for capital.

Often, business owners will use a combination of debt and equity to fund their business.

What are the key points you need to consider?

When deciding between equity or debt financing for your business, these are the key points that must be considered:

Ownership: How will the funding option affect your ownership of the business – are you willing to give any of your equity (shareholding) away?

Control: How will the funding option affect your control over your business’s decisions and strategy

Risks: What are the risks and downsides associated with each funding option?

Short-term vs Long-term: How quickly do you need the finance? Is it to cover short-term cash flow issues? Or is it to fund long-term growth plans?

Liabilities: What are the liabilities associated with each funding option? What collateral is needed to secure the loan? Who is liable? Do individuals have to take out personal guarantees to secure the funding?

Reporting and Regulatory Requirements: What will be the reporting requirements for each financing option? What legal and regulatory reporting is required? How much resource will you need to set aside to manage each funding option?

Business Plan: Do you have a clear business plan that will enable you to return equity to an investor or to repay any debt?

Terms and Conditions: What are the terms and conditions associated with each funding option? Are they straight forward to understand? Will you need legal advice?

Benefits: What are the benefits of each funding option?

Returning to Debt vs Equity Financing…

Considering the points above, the main advantage of debt financing is that you don’t have to dilute any ownership of your business and typically don’t have to give away much, if any, control.

The main disadvantage of debt financing is that it can be more expensive than other financing options as you will have to pay interest on the loan.

You will also have to take on more risk, with a fixed obligation to repay the loan and keep up with an interest payment schedule. The lender will typically take a charge over the business, as a security for the debt, to protect their position and to get their money back if the business fails.

When it comes to equity financing, you don’t have to make regular repayments or repay the full amount borrowed and the risk to you can be lower than debt financing.

The biggest disadvantage of equity financing is that you dilute your level of ownership of the company, and you lose a lot more control over your business and decision-making.

At the very least, you will be expected to produce regular management reports for investors, but often you will have to create a seat on your Board for the investors to keep an eye on your progress, and investors may want a say over key business decisions.

Download: How to Raise Finance for Your Business

If you’d like to find out more about how to finance your business, including an overview of the different options available, our Corporate Finance experts have written this short guide on how to raise finance which also outlines some of the advantages and disadvantages of each funding option.

Do you need to raise finance? Contact our Corporate Finance Team

If you’re looking to raise finance for your business then our advisors can help you to choose the best option for your business and circumstances.

Our team of corporate finance advisors, led by Jerry Scriven, regularly help business owners with business planning, financial reporting, fundraising, management reporting and valuations and we’d be delighted to have a conversation with you to find out about your specific needs and ambitions.

On the other hand, if you are an investor or lender and you are looking for a trusted advisor to undertake due diligence, valuations, or other advisory work before and after a finance deal, then we would be delighted to speak with you too.

Contact our Corporate Finance team on 0161 249 5040 or email partners@leonherman.co.uk

Important Disclaimer

This material is published for information only. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by Leonherman.

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