The Gloves are On - Equity vs Debt!

Equity Funding packs a Punch to Debt

The financial reality of business can often be confronting for most SMEs and it’s not until you run a business that you start to realise what they say is true “Growth sucks Cash”.  

The balance sheet for established SMEs can sometimes include a disproportionate amount of debt capital. If this debt remains unpaid over time, it will start to have a negative impact on growth, that’s because more cash is needed to service debts. Overtime there is less cash available for the business to invest in other growth opportunities.

IMPORTANT DEBT FACTS

  • Unlike equity, debt must at some point be repaid
  • Interest is a fixed cost which raises the company’s break-even point. High interest costs during difficult financial periods can increase the risk of insolvency.
  • Companies that are too highly leveraged (that have large amounts of debt as compared to equity) often find it difficult to grow because of the high cost of servicing the debt
  • Cash flow is required for both principal and interest payments and must be budgeted for, most loans are not repayable in varying amounts over time based on the business cycles of the company
  • Increasing personal debt only leads to further risk and pressure on the owners of the business, as opposed to them focusing on running the business and driving growth
  • Debt instruments often contain restrictions on the company’s activities, preventing management from pursuing alternative financing options and non-core business opportunities
  • The larger a company’s debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can carry.
  • The company is usually required to pledge assets of the company to the lender as collateral, and owners of the company are in some cases required to personally guarantee repayment of the loan

IMPORTANT EQUITY FACTS

Equity funding has long been a mystery for SMEs and traditionally very confronting and difficult to obtain.

However, when equity funding is secured, it has the potential to be a valuable form of funding and here a few reasons why:

  • Equity funding provides a business with a longer timeline to invest
  • Equity funding makes you consider your valuation, which is often overlooked by SMEs
  • Profitability and performance issues are brought to the surface and the business is forced to take more decisive action to fix them
  • It re-engineers the balance sheet and provides the management team with more time to properly align the business strategy, gather the right mix of resources and build a talented team to take to the next phase of growth
  • Equity funding provides a longer cash flow runway, the funds can be deployed into more growth initiatives that previously the business could not previously afford.
  • More time and more opportunity to build ‘off balance sheet’ assets that create future income streams   

If Google or Apple had a balance sheet full of debt, do you believe they could have grown their share price so rapidly over the last few decades. Of course not, because these companies understand the power of using equity funding.

Knowing this now, which funding source seems more appealing to grow the value of your business?

WHO DO WE FUND?

The introduction of CSF allows SMEs with revenue and net tangible assets under $25 million to raise up to $5 Million of capital per annum from retail investors via our intermediary platform.

We look to fund SMEs with proven track records that have a defined growth strategy to present to potential investors. We are industry agnostic and can fund any established business incorporated in Australia.

Equity Crowdfunding might be the right strategy for your business to grow and reach its full potential.