Debt or Equity Financing: When To Use Each (Or Both) (2024)

If you’re wondering when to use debt or equity financing, you may be dealing with the following dilemmas:

  • Control. When should you give up partial control for equity versus when is it best to keep full reign through debt?
  • Risk. Do you want to risk the loss of ownership through dilution or give up personal assets if you default on loan payments?
  • Time. The timelines around equity and debt financing are changing. When you need fast funding, which is the easiest to access?
  • Cost. How much will each option cost you now and in the future?
  • Requirements. You’ll need a strong value proposition to attract equity investors or enough cash in the bank to get debt financing. Does your business really qualify for either one?

To help you decide when it makes sense to use debt vs equity financing, we interviewed Matt Hafemeister, former partner at a16z and currently Head of Jeeves Growth, who shares his insights and reveals when it makes sense to use one, the other or both types of financing.

In this post, we’ll cover:

  • Debt vs equity financing: Comparison chart
  • When to use debt or equity financing?
  • When does it make sense to use both?
  • How to access low-risk, fast debt funding

Unsure whether to use debt or equity financing to grow your business fast? With Jeeves Capital, you can receive cash in the bank in less than 48 hours. Apply today in just 5 minutes.

Key takeaways:

  • Both debt and equity financing are changing. Equity is no longer as quick as it used to be and digital debt lenders are making it easier to access capital and get funding fast.
  • Equity financing is essential to new companies just starting out. But once you have some equity as a startup, leveraging debt financing makes sense.
  • Use both debt and equity together to create an optimal capital structure and make your company more financially stable as you grow.
  • Consider alternative debt providers, like Jeeves, with more flexible financing and faster funding than equity or traditional debt lenders.

Debt vs equity financing: Comparison chart

Debt or Equity Financing: When To Use Each (Or Both) (1)

When do you use debt or equity financing?

It may be difficult to know when to use one or the other because debt and equity financing are evolving.

Since the start of 2022, equity is harder to come by. Equity investors and venture capitalists are more selective than before and months can go by before they reach a decision or deploy funds. You also risk receiving low valuations and underselling your shares in a more discerning market.

On the other hand, digital debt lenders are making it easier to access debt. Traditional financial institutions will want to see debt instruments like a business plan, a credit score and personal guarantees and will take weeks or months before coming to a time-consuming decision.

Instead, digital debt providers will base decisions on your ability to pay them back by looking at your cash flow and revenue. With digital term loans, you can receive funding in a few days.

Now that you know how these changes can affect your funding, here are Matt’s suggestions on when it’s better to use equity or debt financing:

When to use equity financing

One important aspect business owners often overlook when considering debt vs equity financing is that investors are underwriting massively scalable companies. So, if your goal is venture scale, focus on equity through venture capital.

“Venture scale is very different from building a company. It means you take on a huge amount of money, hire people, burn a lot of cash, and get to that next stage as soon as possible. So equity is well suited for companies and entrepreneurs that want to get really big really fast.” – Matt Hafemeister, Head of Jeeves Growth

In addition to venture scale, you can also use equity funding when you:

  • Are a new business. During seed and angel rounds, equity is your best option because you won’t have enough creditworthiness, cash flow or collateral to finance with debt. Angel investors won’t care how many assets you have on your balance sheet. They want to see the potential of your business and the possibility of high ROIs.
  • Plan on rapid growth. Equity allows for greater innovation to fail, learn, and succeed fast because you’re not focused on generating revenue. Instead, you’re intent on the best product-market fit and product iteration to beat the competition.
  • Want business partners who can help you grow quickly. Many investors can act as mentors, guiding you to success. With equity, you can exchange shares for business knowledge and guidance.
  • Have more time. Equity takes more time than it used to. Discerning investors will want to explore the viability of your business before committing.

When to use debt financing

“Not everyone wants to build venture scale. Debt is a great alternative for businesses that are thinking about fundamentals, like profitability and cash flow generation.” – Matt Hafemeister, Head of Jeeves Growth

If you don’t have a blue ocean strategy and don’t plan to be a disruptive company like Uber, Airbnb or Netflix, then choose debt financing.

You can use debt financing for both short and long-term solutions to become profitable and build your business.

For example, you can use short-term capital funding to pay for supplies or inventory so you can generate cash flow early on without diluting your future profits.

Long-term debt funding can help when you have large investments such as acquisitions and new country launches or important assets to purchase like machinery and real estate.

You can also use debt financing when you:

  • Want to retain control of your company. Debt lenders aren’t looking for control, just stable revenue, credit history or a credit score, and your ability to meet your interest payments.
  • Need funding fast. Digital debt lenders can fund you in a matter of days so you can start investing to generate revenue quickly.
  • Can’t afford to spend more. Debt will cost you only interest. Once you’ve paid back your loan, you’re done. There’s no long-term profit sharing involved.
  • Shift your focus from scaling a company to building a business. You may have started out with venture scale in mind, but now you prefer to build a prosperous business and focus on generating cash flow.
  • Equity is no longer available. For example, debt financing can help you manage your startup during a downturn and keep you default alive by extending your runway.

“When equity is really hard to come by, you can turn to debt and start thinking about capitalising your business. You can start to raise funds, extend your runway, leverage your balance sheet, leverage your revenue, leverage your customers to get more capital to then invest in those growth businesses without touching your core cash revenue and your core cash runway.” – Matt Hafemeister, Head of Jeeves Growth

When does it make sense to use both debt and equity?

If you rely too much on one type of financing, you can lose your business or go bankrupt.

Let’s take overzealous equity-financed companies like DoorDash and Uber as examples. The founders of DoorDash only owned 2% of their company by the time it went public. And investor pressure eventually forced Travis Kalanick out of Uber.

By using a balance of both types of financing, you can mitigate the risks of equity dilution and reduced control and take advantage of digital debt’s flexibility and speed.

Up until recently, early-stage companies haven’t had the same luxury as more mature businesses and could only count on equity.

Today, you have more options available on how to grow your company thanks to alternatives like venture debt and to digital debt lenders.

An ideal time to use both equity and debt is when you’re about to raise an equity round. When you just raise, it’s easier to take out debt because you can leverage your cash flow and provide stronger guarantees to debt lenders.

Matt also suggests to start using debt and equity together as soon as you can to create an optimal capital structure for your business.

“If you look at big companies like Apple or Amazon, their capital structure is a combination of equity and debt. They raised equity, went public, and raised new rounds, but they also have debt. And because they are low-risk businesses, they can pick and choose. Sometimes they do stock offerings, other times they raise debt. They can figure out which one they need for efficient capitalisation.” – Matt Hafemeister, Head of Jeeves Growth

Matt says to use equity first until you start to grow. Once you have the predictability of cash flow, stable revenue, and assets on your balance sheet, you can use these as leverage to access debt financing and create your optimal capital structure right away.

Considering venture debt as an alternative? Find out what venture debt is and if it's the right type of financing for you.

Consider both debt and equity financing

When you use debt or equity financing depends on your business, the stage of your company, growth speed, and a variety of factors. Each company is different, so each founder’s needs will differ.

We hope our insights help you find the best financing option for you and your business.

If you’re a growing business looking for a financial operating system, try Jeeves.

Debt or Equity Financing: When To Use Each (Or Both) (2024)


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