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Equity vs. Debt

Financing a business can come in many forms, but regardless of how you raise cash, more often than not you will be dealing with equity or debt. So, let’s explain what they are, and how they can work for or your fashion business.

Funding the business by equity

Investors, mostly venture capitalists or angel investors, invest money in your company and therefore end up sharing ownership of the company with you. In other words, they take equity in exchange for the cash they invest.

Such investments are made in the hope that your business will grow, and that they will have some positive return through shared profits. Depending on the investors, you may be offered some resources and expertise as part of the investment, to help drive the business further.

There is a general misconception that the best investment is money and nothing more, but in reality, it is great if you find friendly and helpful investors, and draw on their knowledge and experience. In some cases – and in fact more common than one would think – such investments may also lead to the demise of a company. If the founders and investors disagree fundamentally on the direction of the business, and how it will be executed, then their ‘help’ is no longer welcome and is more of a poisoned chalice.

So it is important to remember that when evaluating equity investors, you choose someone who is aligned with your strategy and who has the industry and/or functional experience that your business needs to grow.

Funding the business by debt

Debt financing usually comes in the form of loans, where you are required to pay back the money you have borrowed, plus interest. Repayments are fixed to a timeline and spread over a pre-agreed length of time.

Loans are great to provide – or ease – the company cash flow, and the lenders are not usually involved in the business in any way. Just as with a mortgage on a property, repayments must be honored or you will risk defaulting, which in the worst case, could drive your business into bankruptcy.

It is important to remember that debtors should always be paid back before any profits are shared amongst the shareholders of your company.

Ninety-nine percent of all businesses do not grow to become big businesses without either of the above options having been utilized at some point. Both options are invaluable routes to success when used wisely and carefully.

To do list before even considering for a loan:

  • Make a pre-business plan to find out how much funding you require, who will you be serving, etc.
  • Decide on the business structure which suits your business. Is it, sole proprietor, private limited or partnership?
  • Fill the B-plan template after the above two things are ready.