Right from the start, most entrepreneurial ventures face the big question of financing. What kind do you need, how much, and for how long? The answers to these questions can change the path of your business, and, of course, help it to grow.
Lending expert Ami Kassar, entrepreneur Christopher Kelly, and angel investor Clayton White discussed the value of debt versus equity financing Thursday during a breakout session at Inc.’s GrowCo conference in New Orleans.
“The most important thing, when you are looking for money, is that you should get some advisors who you trust,” Kassar said. Kassar primarily helps small business owners find debt financing, which includes asset-based lending, purchase order financing, factoring, and bank loans. Similar to equity investors, debt investors are betting on the future value of your company, so they are also looking for a say in its direction, Kassar says. So you need to make sure your creditors have goals that match yours.
By contrast, equity investors are looking for a good opportunity to make money within three to five years, so they’re searching for a credible story they can back, says White, who runs the South Coast Angel Fund in New Orleans.
“With the angel fund, we are looking at whether we can we get the company to the point where we can go to a venture firm, or make it a bankable company that can now get a loan,” White says.
More and more frequently, equity investors want to provide financing in tranches, based on the company achieving performance milestones, White says. So if it's equity investment you want, it might be more useful to come up with a financial plan that shows investors what the company will need financially in the next six months, rather than a grand five-year plan seeking millions of dollars. Having such a plan, and sticking to it, is better in the long run.
“Terms get better once you make milestones, like having sales and revenue, which are key when you go to a lender,” White says.
Debt and Equity Together
Financing your business doesn't have to be an “either/or” equation, says Chris Kelly, co-founder and principal of Convene, a conference hall provider in New York. Kelly has raised both debt and equity, and notes that they don't have to rule each other out. They can even be contingent on one another, Kelly says.
“When we started out the company at zero revenue, we were raising equity because we would have been crazy to be using debt, so we were building assets as we went along. Once we had a business with a track record, then we were able to raise a major round of debt, which was favorable and less dilutive,” Kelly says.
Remember to shop around, whether it’s debt or equity financing you’re looking for, says Kelly. Terms can vary widely from source to source.
“It’s an illusion that it is all about getting the money,” Kelly says. He suggests businesses try to get more than they actually need, but not as much as they want.
When he was raising money, Kelly says Convene had offers from two equity investors for $10 million. One offer “had better economics”, while the other was more useful strategically. The founders chose the strategic investors, because they figured that in the long run it would help the company more, by providing access to new connections and new networks.
Says Kelly: “What I really want to know, if somebody has raised capital, is on what terms and with whom."