Deciding Between Debt or Equity Securities Financing in Oregon
What you need to know about each type of offering
on September 14, 2021
Updated on August 31, 2022
In order to build and expand a business, you may need access to outside capital. Your options for raising money from investors can be broken down into two broad categories: debt financing and equity financing. So what are the differences, and how do you decide between the two?
“There’s a real continuum between debt and equity with a lot of hybrid instruments in between that have characteristics of both,” says Mary Ann Frantz, a corporate finance attorney at Miller Nash in Portland. “It really comes down to the financial strength of the organization, what purpose they’re raising the capital for, what their prospects appear to be, and whether they’re a more stable business where they’re not likely to increase rapidly in value, unlike a startup company. There are many different factors to consider.”
Debt Financing: Explained
Simply put, debt financing occurs when a company sells “debt instruments” to outside investors. “With equity, you don’t have to pay it back, while with debt you theoretically do,” Frantz says.
In effect, debt financing is a loan. The money raised from investors must be paid back in accordance with the specific terms of the debt instrument. Depending on the circumstances, debt financing may be the best option for an Oregon business looking to raise capital. Here are four advantages of debt financing:
- Debt financing does not dilute one’s ownership stake in the business
- Debt financing allows for significant real returns if the company can use the funds that were raised to promote strong growth
- The repayment terms and conditions are generally fully known at the time of the transaction—meaning debt financing allows for predictability
- The interest payments on the debt are usually tax deductible for a business
Equity Securities Financing; Explained
Equity securities financing is an alternative to debt financing. Instead of taking out a loan from investors, the company sells some of its shares in exchange for an influx of investor capital.
“People who are looking for a major pop in appreciation and value are going to head more towards equity, while debt has more certainty of repayment,” Frantz explains. “It’s never absolutely certain, of course, but there’s usually either a fixed return or a variable interest rate. But in any event, there is a return that’s penciled into the debt document.”
Here are three key advantages of equity securities financing:
- Equity financing does not have to be repaid—meaning it allows business owners to reduce their risk
- Equity financing, at least initially, decreases a company’s “debt-to-equity ratio”—meaning the company remains in a better position to get a loan approved by lenders if necessary
- There is no reason to worry about monthly fixed costs related to the investment because there is no repayment and interest rate, unlike debt financing
Should I Get a Corporate Finance Attorney?
Raising money for a business in Oregon is complicated. Not only do you need to decide on the right approach, but it is crucial that you execute the transaction properly. Notably, if your business is offering debt or equity securities, there are important federal and state regulations that apply, potentially including the Securities Act of 1933, the Securities Exchange Act of 1934, and the Oregon Revised Statutes Chapter 59.
“If you’re doing anything other than a very small, standard transaction, you should always get legal advice,” Frantz says. “Even a large, sophisticated company that has standard forms of contract still sends us all of their loan contracts to confirm that they are being filled out correctly. If it’s a significant transaction to the borrowers or the company that’s offering securities, you should always get legal advice because, similar to real estate agents, the business broker or investment banker, while technically representing the company issuing securities, has a significant interest but their main interest in earning a commission that is dependent on closing the transaction.”
There are no one-size-fits-all solutions to financing a startup company or other type of business that is expanding. Professional guidance and support is available. A corporate finance lawyer will help you determine the best course of action for your business. If you have any questions about debt offerings and equity offerings, an experienced Oregon securities attorney can help.
For general information on securities law, types of securities, exemptions, and shareholders, see our overview of securities and corporate finance law.