Evaluating Capital Options for Growth
Fridays with Vistage is a webinar series on relevant, timely and actionable business topics to help you generate results in your business. On Friday, September 18, Peter Lehrman of Axial will present, “Evaluating Capital Options for Growth, Part 1,” You may register for it here.
For many owners starting their business, financing begins with securing a loan from their local bank, reaching out to friends and family, or dipping into their own personal savings. But the majority of growing businesses have access to a broad spectrum of capital options that should be considered. At the highest level, this capital is categorized as either debt or equity financing – and both forms of capital have both upsides and risks that need to be considered.
Debt provides owners the ability to transfer income across time and space — allowing you to use future earnings to finance present-day investments, and pay back your lender later. Debt can be extremely helpful in allowing you to grow without giving away any ownership. By taking a loan to finance your business, you’ll pay more upfront in order to grow with much stricter conditions, but once the debt is paid off you’ll own all of the larger and more valuable business. In addition, loans are a great way to finance business improvements. By purchasing a large piece of equipment with a loan, you can get use the increased productivity to pay down the loan faster. If you can generate revenue at a faster rate, or even a nearly even rate as the interest on the loan, then the investment can end up paying for itself.
Equity financing is the process of selling ownership stakes in a company in order to raise funds for a business. Rather than pay back the investment over time as with debt financing, you agree to exchange a percentage of ownership in your company in exchange for the capital invested. Anyone with an equity stake in your company has a vested interest in its success. They want to see it grow and flourish and as such will leverage their skills, expertise, and connections to help increase the business’s value. Investors often work with business owners in an advisory capacity, and their business savvy, in addition to the influx of capital, can help businesses grow in ways that may have been impossible without their support.
The composition of a given company’s liabilities (debt or equity) comprises the overall capital structure. A company’s capital structure is arguably one of its most important choices. It influences the firm’s risk profile and helps determine the accessibility and cost of funding. It affects the return investors and lenders expect, as well as how insulated the firm is from both microeconomic business decisions and macroeconomic downturns. Obligations at the top of the capital structure are low-risk, low-cost, and have the highest seniority in the case of a liquidation event (that is, they must be repaid first in the event of sale, restructuring, or bankruptcy). Obligations at the bottom of the stack have the highest risk and cost, and the lowest seniority. For large corporations, the capital stack often consists of senior debt, subordinated debt, hybrid securities, preferred equity, and common equity.
To learn more about the various capital options and to begin working through what’s best for your business, join Axial’s CEO, Peter Lehrman, on September 18 at the Fridays with Vistage webinar where he’ll be discussing the various types of capital available, how best to evaluate those options, and the capital structure that could be best for your business. Register here for Friday’s webinar.