When a company needs capital, the first instinct is often to ask where it can be found. A better first question is what kind of capital the business should carry. Debt and equity, and the many structures in between, each bring different costs, obligations and consequences for owners. Choosing among them is a strategic decision before it is a financing one.
This note is general information for management teams and boards. It is not advice about any particular company or transaction.
What debt asks of a business
Debt is typically less expensive than equity and does not dilute ownership. In exchange, it requires regular payments and imposes covenants and other constraints. It suits businesses with predictable cash flows and assets that lenders can rely on. For a company whose earnings are volatile, or whose plans require flexibility, the same obligations can become a burden at exactly the wrong time.
What equity asks of a business
Equity does not require repayment and can absorb losses, which makes it well suited to companies investing for growth or facing uncertain outcomes. Its cost is ownership and, often, a degree of governance: new shareholders, board seats and rights that shape future decisions. Owners who raise equity are taking on partners, and partners have views.
“The right structure is the one the business can live with in a bad year, not only the one that looks best in a good one.”
Questions worth answering first
- How predictable are the company's cash flows over the life of the financing?
- What does the capital need to accomplish, and over what period?
- How much control are the current owners prepared to share?
- What happens to the company if results fall short of plan?
- Which investors or lenders are best suited to this business and this stage?
Combinations and alternatives
Between straightforward debt and common equity lies a range of options: preferred equity, convertible instruments, structured or asset-based financing, and more. These can help match capital to a company's specific needs, but they add complexity, and their terms deserve careful reading.
Slate Blue Summit advises issuers on debt and equity capital markets and private placements. Whatever the eventual structure, the most useful conversations begin with the company's own answers to the questions above. A clear view of what the business needs makes it far easier to find the right capital, and the right partners, to provide it.
Perspectives are general information and reflect the views of Slate Blue Capital at the time of writing, which may change without notice. They are not investment, legal or tax advice, do not describe or offer any security, fund or service, and should not be relied on in making an investment decision. See Important information.