Equity Capital Versus Debt
The two most significant differences between private equity capital and debt are availability and dilution. Equity capital is available to startup, expansion, and growth companies; debt is typically only available to late-expansion, growth, and stable companies. Banks issuing debt will be most interested in seeing that a company has cash flow (to service the debt), has a solid balance sheet with sufficient collateral/assets, and has an acceptable amount of leverage (debt-to-equity ratio). Equity providers, on the other hand, will typically be focused on maximizing the value of the company through strategic growth initiatives. Equity investors tend to be more active than debt providers, often times utilizing their resources, industry connections, and expertise to enable the business to expand and become more efficient. Whereas debt providers tend to be secured by the company’s assets, equity providers are typically unsecured and therefore the equity capital provided tends to be a bit more expensive than traditional bank debt. Because equity is dilutive and more expensive for the business owner, it’s best suited to support initiatives that don’t support asset growth, such as opening new locations.
Following are the terms one can expect for various types of debt and private equity:
For more information on obtaining private equity for a growing company, contact DCA Capital Partners.