Debt or equity: which is the Best Way to Raise Capital for Your Business?

• Position: Money Talk

My first job out of college was with a Fortune 100 company that measured success by market share and revenue. When my team saw opportunities to strengthen our market position, we simply put together a budget and submitted it for funding. Senior management either approved the project or turned it down. Money was a figure on a spreadsheet and we had a seemingly endless supply.

I look back at this experience nostalgically as one might reflect on their childhood. Fun days, but boy was I naive. If you don't have the balance sheet of a Fortune 100 company, how do you raise money to support growth, develop new products or pursue opportunities? Company owners generally have just three sources for capital: retained earnings, debt or equity.

Retained Earnings (your company's profits) The cheapest source of capital is always your company's retained earnings. Run your company profitably and each month the balance of your business bank account grows. Sometimes, however, the best long-term decision is to invest more money than your company can earn and save. For this, you will need debt or equity.

Debt (a loan from friends, family or the bank)

Debt is generally less expensive than equity but can be difficult to obtain and often comes with constraints on the business.

Owners who think they may want to pursue debt in the future are well advised to work with a knowledgeable accountant to make sure all their financial books are in order. Build relationships with banks well before you need money and periodically keep them apprised of your company's progress. Nothing builds confidence with a banker like seeing a business meet its goals quarter after quarter and year after year--particularly when that business is not yet asking for a loan.

Perhaps the most daunting part of incurring business debt from a bank is the personal guarantee. If the business fails, the company owner could lose some or all of their personal assets. Banks always say that the personal guarantee is non-negotiable; however, the rigidity of this requirement .changes over time. In other words, sometimes it is more non-negotiable than others. If a personal guarantee is a deal breaker for you, consider hiring a professional debt broker. Unfortunately, finding a good debt broker can be more difficult than finding a bank to lend you money.

Equity (selling a partial ownership stake in your company)

Equity is typically more expensive than debt, but it comes with greater...