Definitive Business Plan, Second Edition, The

Debt or equity?

Along the way, I have assumed that you will use trade credit as and when it is available. Your choice for your excess cash requirement is to fund it by borrowing or by increasing the owners' capital. The owners might be a sole proprietor, partners or shareholders. The jargon varies, so from now on I will refer to loan capital as debt and to owners' capital as equity. With that out of the way, what difference does it make whether the funding comes from debt or equity?

Comparing debt and equity

Debt is repayable

Lenders are very demanding. They are concerned mainly with security and cash flow. They usually lend to you only if you own more than you owe (so that they can seize your assets if you default on repayment) and if you can ...