by Martijn Lentz
Funding your startup with equity or loans? You don’t have to choose one. KVK breaks down the perfect mix of debt & equity funding. While there are no hard and fast rules, if you are setting up your business, it makes sense to strongly consider equity financing in order to get the business off the ground. Investors don't require fast repayment, and most startups don't turn a profit for a significant time period. If you are getting a steady revenue stream, then loans make a lot more sense. In addition to this the ‘use’ of the money is important for the route debt or equity. All in all it’s the right mix that fuels your startups’ growth.
The mix of equity and debt
As a founder it’s important to understand the difference between debt and equity financing, by angel investors or venture capitalists (VCs). No hard or fast rules apply.
Equity financing involves giving a portion of the shares of your company to investors in exchange for money. Investors will provide equity financing when they are convinced of the upside potential of your company in the future. The portion of the shares that will be sold depends on the valuation of your company at the time of the financing.
When a company borrows money from third parties to be paid back it is known as debt financing. A startup typically takes up a loan to finance working capital. Lenders will provide credit when you can explain how you can ensure back payment. A company takes on debt financing because it’s often cheaper and less risky than financing the whole growth with equity. Too much debt however is also risky and thus, founders have to decide the debt to equity ratio which they are comfortable with.
Martijn Lentz is a KVK Entrepreneurial Financing Expert. During Amsterdam Capital Week 2018, he will post a short daily blog on ‘How to raise capital in five days’. Do you have any questions? Contact KVK’s Startup Information Desk 00 31 88 5852222, or e-mail firstname.lastname@example.org. You can find Dutch info on KVK.nl/startups.