Business financing - the money provided to businesses - comes in the form of either debt or equity. The question is: which is right for your business?

A business loan is debt - money you receive from a lender with the expectation of being repaid with interest at some specified rate over a specific period of time. Lenders make funding decisions based on the Five C's of Credit: Character - does the borrower have serious intentions to repay; Capacity - the ability to repay; Capital - the borrower's general financial condition as reflected in the financial statements; Collateral - assets offered as security; and Conditions - general economic conditions and circumstances peculiar to the borrower's industry or geographic area.

Equity is an ownership interest in a business - the investors buy stock (in the case of a corporation) or take a partnership position. Equity investors who are not actively involved in the day-to-day operations of a business are generally those who are investing with the expectation of rapid and sustained growth in value of their investments.

Mezzanine Financing is a hybrid of debt and equity financing. Mezzanine financing is typically used to finance the expansion of existing companies, and it is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.

Since mezzanine financing is usually provided to the borrower very quickly with little due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20% to 30% range.

Mezzanine financing is advantageous because it is treated like equity on a company's balance sheet and may make it easier to obtain standard bank financing. To attract mezzanine financing, a company usually must demonstrate a track record in the industry with an established reputation and product, a history of profitability, and a viable expansion plan for the business (e.g., expansions, acquisitions, IPO).

A well written business plan will demonstrate to a lender or investor that the criteria important to them will meet or exceed their expectations.

Debt or Equity Financing? The Business Plan Store can help you decide which is best for your business, and we can write your business plan to address the audience that can best fulfill your financing needs.