A Debt to Equity

A new website http://www.firstfunding.org/ focused on raising debt financing from Business Angels has recently launched which is extolling the virtues of companies of this form of finance, rather than equity funding. As they note, most funding rounds for early stage businesses may incorporate a mixture of debt and equity, normally with the equity funders leveraging off the debt funding that is available from government back schemes, such as the Enterprise Capital Fund. Therefore, I am a bit bemused that the website leads on debt financing.

Making money by lending to companies the banks won't back is a tough ask without the equity element. The reality for most Business Angel deals is that the ones that fly need to pay for the ones that don't and no matter what interest rate you apply to a loan, the reality is that participation in the equity upside is required to make the numbers add up from a portfolio perspective. Our own FastInvest loan scheme seeks to do this by us agreeing with the company an appropriate equity option. Obviously not all companies we back will go on to greatness, but if some do we have a chance of getting back more than the accrued interest and capital.

There is a danger for many young businesses that they take on too much debt too early and not enough equity. Connect Yorkshire exists to help companies make the right funding choices and we offer impartial advice. Just as with the banks, making loans to companies requires that they generate sufficient cash flows to repay on the agreed schedule. The great virtue of equity is that there is usually no obligation to repay it unless there is an exit for all shareholders. Between pure debt and equity are a range of instruments to balance risk and reward. Attending our Investor Readiness Programme that gets underway on the 22nd April is a great way to get to grips with this subject. Why not register to come along and learn more about debt and equity funding!