Does A Canadian Business Owner Choose Debt Or Equity For Growth ?

Every Canadian business, start up or established, at a certain point, needs capital! The textbooks tell us (and its true) that you should postpone giving up equity in your company as long as possible. That allows you to sell at a higher price, or ?valuation? at a future point in time.

However, the current tight credit conditions, plus your friendly bankers request for you to put more money into the business, forces many business owners to re assess the equity alternative.

Both borrowing and equity have costs of course. Debt, loans, etc has interest charges that reduce profit. New equity does not reduce profit, but it does reduce the owner’s piece of the ownership pie, so to speak.

Let’s say a customer need to expand his business. We will use a specific example. If you want to borrow 200,000.00 and the loan costs, let’s use 15% as an example. You also have an alternative of a private investor who is willing to put up that same amount of money. His rationale is that he will pay 20 times the estimated profit you will make this year.

When you or your accountant run the numbers the accountant will look at the earnings before interest and taxes. We hear that commonly called 'EBITDA '. So if your EBITDA was $530,000 and your accountant ran the numbers he would tell you that the pure math of the transaction indicates it might be best to take the equity , since it creates higher earnings on this transaction . For the purposes of keeping some additional levels of finance and tax rates out of our discussion, we are simply saying that traditional financial analysis would say that equity might be the way to go on this one.

Naturally every business owner wants to looks at all pieces of the puzzle . for example:

What additional risk is involved in borrowing?

What flexibility, or lack of flexibility, comes with both scenarios?

Timing is everything. Will rates improve, or will my company be worth more if I wait and just borrow

Leverage ? Can my firm handle the additional debt if I do the borrow scenario

In summary the bottom line is of course ‘ Consider your alternatives carefully, and with a trusted advisor’. Don’t take on debt if you don’t have to, but don’t sell ownership if you don’t have to .Use proper financial analysis to make an informed decision .

By: sprokop

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Stan Prokop is the founder of 7 Park Avenue Financial. See www.7parkavenuefinancial.com The company originates business financing for Canadian companies , and is a specialist in lease financing, working capital financing and asset based lending. www.7parkavenuefinancial.com/business_financing_services.html