BUSINESS FUNDING
Debt or Equity: Which One You Are Actually Choosing
Every owner who needs money asks the same first question, and it is the wrong one. The question is how much. The question that actually decides the outcome is what kind.
Debt and equity are two different prices for the same dollar. Choosing badly rarely shows up for two or three years, which is exactly what makes it worth an hour of thought today.
What each one actually costs
Debt has a price you can write down. Interest, fees, a schedule, an end date. You know the total before you sign. When the last payment clears, the relationship is over and you own everything you owned before it started.
Equity has a price you cannot write down. You are selling a share of every dollar the business earns from now on, including the dollars from the thing you have not thought of yet. If the business stays small, that share cost you very little. If the business becomes what you hope it becomes, that share may be the most expensive money you ever took.
So the comparison most articles make, a percentage against a percentage, is the wrong comparison. Debt is a known cost over a fixed horizon. Equity is an unknown cost over an unlimited one.
The question that settles it
Before any of the rest of this matters, answer one thing honestly.
Can the business service a payment out of cash that is already arriving?
Not projected cash. Not cash that appears once the money is deployed and the plan works. Cash that arrived last month and the month before that, which you can show on a statement.
If the answer is yes, debt is usually the cheaper money and you should start there. If the answer is no, you are asking a lender to fund a forecast, and lenders do not fund forecasts. They fund history and they fund collateral.
Two measures make this concrete. Interest coverage asks how many times over your operating earnings would cover the interest you are about to owe. Debt to earnings asks how many years of current earnings the whole balance represents. You do not need a banker to run either one, and running them before you apply tells you what the answer is going to be.
Then size it for a bad quarter rather than a good one. A payment that works in your best month and fails in your worst month is not affordable. It is a bet on the calendar.
What the debt side really asks of you
Three realities that rarely appear in the marketing.
The personal guarantee. For most owners borrowing at most sizes, the lender will ask you to sign personally. That signature reaches past the entity and attaches to you. The corporate protection that every article on structure describes is real, and none of it survives a guarantee you signed voluntarily. Read who is bound, what triggers it, and whether it follows you after a sale of the business.
Covenants. A loan agreement tells you things you must do and things you may not do. Deliver statements on time. Maintain insurance. Do not take on new borrowing. Do not pay yourself a distribution. Do not sell an asset without consent. Keep a stated ratio above a stated number.
What catches owners is what a breach means. You can be in default while current on every payment. A missed reporting deadline, or a ratio that slips for one quarter, is a default under the agreement, and a default hands the lender rights it did not have the day before. Waivers exist. They cost fees, and sometimes they cost terms.
Collateral and priority. A lender taking a first claim over everything you own makes the next lender's job harder and your next raise slower. Ask what is being pledged and ask who stands in front of whom, because that answer constrains your options for years.
What the equity side really asks of you
It is permanent. There is no maturity date on a share. You do not retire it on a schedule. Buying it back later, if it is even possible, happens at a price set by how well you have done in the meantime.
Dilution is not automatically bad and is occasionally fatal. Owning a small slice of something enormous is a fine outcome. Being diluted meaningfully for a cheque that did nothing to change the trajectory of the business is not. The working rule is easy to state and hard to obey: accept dilution when the investor makes it worth it, and not otherwise.
Control is separate from ownership. Board seats, protective provisions and consent rights can leave you holding a majority of the shares while unable to sell the company, hire an executive or open a new line without a vote. Founders read the valuation and skim the control terms. The control terms decide whose company it is on a bad day.
Liquidation preference decides who gets paid. When money eventually comes out of the business, it comes out in an order, and invested capital usually sits ahead of common stock.
There is one more thing owners underestimate. An equity investor is buying an exit. Their fear is almost never whether the business will work. It is whether they can ever get their money back out. Private shares have no natural liquidity, so if your structure offers no plausible path to a sale, a buyback or a public market, you are not offering an investment. You are asking for a gift with paperwork attached.
When each one is the right answer
Debt is the cheaper money when the cash flow already exists, there is an asset to secure, the use of funds has a measurable return, and the payback period is short enough that you can see the end of it from here.
Equity is the only money available when the business is pre-revenue, the revenue is lumpy, there is nothing to pledge, the payback runs years out, or the balance sheet already carries as much debt as it can service. Also when the plan needs to survive being wrong for a while, because a lender will not wait and a shareholder sometimes will.
There is a middle. Convertible instruments and revenue-based financing sit between the two and carry their own consequences for your ownership. Those deserve their own reading before you sign one.
The one page to write first
Before you talk to anybody, write down three things. What the money buys. What it returns, in cash, by when. What happens if it returns half of that.
An owner who can answer those three gets offered better terms by both kinds of money. An owner who cannot is not ready for either, and finding that out on your own page costs nothing.
Where PRBE fits
We work with owners on this decision before an application exists, because the structure and the instrument get chosen once and lived with for years. That review costs you a conversation.
This is an explanation, not legal, tax or investment advice. Rates and terms vary by lender, and the tax treatment of each instrument varies by structure and by year. Have counsel and an accountant review anything you are asked to sign.
Common questions
Should I take a loan or give up equity?
Start with whether the business can service a payment out of cash that is already arriving. If it can, debt is usually cheaper. If it cannot, a lender will decline and equity may be the only money available.
What is a personal guarantee on a business loan?
A signature that makes you personally responsible for the loan if the business cannot pay. It reaches past the entity, so the protection your corporate structure gives you does not apply to it.
What are loan covenants?
Promises inside the loan agreement about what you will do and will not do, such as delivering statements on time or taking on no further borrowing. Breaking one is a default even if every payment is current.
How much debt can my business handle?
Run interest coverage and debt to earnings on your real numbers, then size the payment against your worst month rather than your best. A payment that only works in a good quarter is not affordable.
Is equity financing more expensive than debt?
Usually, over a long enough period. Debt ends. Equity is a permanent share of everything the business earns afterwards, including earnings from things you have not started yet.
Why do investors care about an exit?
Private shares cannot easily be sold, so an investor is buying a future route to their money. If there is no plausible path to a sale, a buyback or a public market, most will pass.
Mark Jones, the Deal Surgeon
Mark Jones sits down in THE DEAL ROOM and opens a deal the way a surgeon opens a patient: where the problem actually is, what comes out, what stays. Rounds, terms, the cap table, and the language that decides who gets paid first.