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
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.