Debt financing involves borrowing money that must be repaid over time, usually with interest. This could take the form of bank loans, venture debt, convertible notes, or revenue-based financing.
Pros:
- Ownership remains intact.
- Debt can be less expensive than giving up equity in the long run if the company grows successfully.
- Faster processes compared to equity fundraising.
Cons:
- Regular repayment obligations, which can strain cash flow, especially if revenue is unpredictable.
- Financial covenants or restrictions that limit flexibility.
- Risk of insolvency if the company cannot meet repayment terms.
Hidden Risk:
Debt magnifies both success and failure. It can accelerate growth when used wisely, but if revenue falls short, the pressure to service debt can limit strategic options or even threaten survival.
How to Decide?
There is no one-size-fits-all answer. The best path depends on factors such as:
- Predictability of revenue streams
- Gross margins and profitability outlook
- Funding terms (interest rates/repayment terms vs. company valuation)
- Investor’s level of involvement
- Risk appetite of founders and investors
- Long-term vision for control and exit
In some cases, a blend of equity and debt provides the optimal balance, fuelling growth while minimizing dilution.
Choosing between equity and debt is one of the most strategic financial decisions a company makes. It affects not just the next year, but the trajectory of the business for years to come.
It is important to consult early with experienced advisors who can help model scenarios, negotiate terms, and align financing decisions with your broader business vision.
The right capital structure is not just about raising money. It is about building the future you want for your business.