Is it better to raise money through offering debt or offering equity?
Answers
304 points
BradOK answered one year ago …
I guess it all depends on a few factors:
1. What does it cost to raise the debt? In other words, what type of interest will the debt come with?
2. How much of the company will you have to give away in order to raise equity financing? Let's say it's 25% of the company, then that means every shareholder will be getting 25% less of the profits that business generates.
Now that might be OK if the expected return after raising the equity capital is commensurately higher.
You should do some research into the Weighted Average Cost of Capital (WACC) calculation and the Capital Asset Pricing Model (CAPM) calculation. I think it'll make a lot of this much clearer.
142 points
zachmckinney answered one year ago …
Yeah - WACC will depict how much it costs to borrow for debt and equity, which can help you to decide.
If the company has a good history, debt might be cheap as banks will be willing to lend to you at a low cost of capital. Just think of it from a personal perspective, if you have good credit and good history of making money and paying off your debts, banks will be more willing to lend. However, for new companies this might not be an option.
For companies with a shorter history but good future outlook, they might choose equity, but earnings become diluted with more partners as mentioned above.
