Understanding the fundamental difference between Equity Investment and Debt Commercial Capital is important as it becomes an important decision in the growth of your business.
Equity Investment means that you are willing to sell part of your idea to bring in funds to help build the company. That will mean; What is the pitch? How good is the team? Have they ever raised capital before? What will the capital be used for to build shareholder value? What is the exit plan? All these questions must be answered in a bullet proof fashion, meaning no holes in the story. Entrepreneurs seeking investors should plan a marketing strategy to go after them and plan to do plenty of presentations smoothing out the rough spots, answering all the objections.
Debt Financing is collateral based, relatively easier to obtain, ultimately less expensive to the entrepreneur, and doesn’t have partnership strings attached. But it relies on liquid collateral such as; real estate, revenue (in the form of account receivables), or equipment. These forms of collateral can be quickly turned back into capital in case of a default, so their value can be borrowed against. In most cases, but not all, you need to have a company that is already making sales, has a fairly good track record both personally and with the business. With invoice factoring, an early stage company with little or no track record but creditworthy invoices can easily obtain financing to help grow the business.
Each form of capital raise has its own place when considering obtaining and using the capital. They are not mutually exclusive and can be used in parallel. For more about the differences between Debt vs Equity capital read this article.