When thinking about how to fund a business, the question often comes up: “Should we be raising equity or debt?” which leads to “What should equity be used for — and what should debt be used for?” and maybe even “which is better?”
I think anyone who reads that question is thinking to themselves the answer to that is obvious, but you would be surprised at how often that answer is very much in the eye of the beholder and situation specific. The answer isn’t one-size-fits-all. It depends on perspective. An equity investor may see things differently than a lender, and both may have a different view than the business owner. One thing we regularly walk through with our business owners is this: What is the motivation of each party? Understanding this is key to designing a capital structure that works for everyone.
The Core Difference: Value Creation vs. Loan Repayment
At the most fundamental level:
- Equity is typically motivated by increasing enterprise value.
- Debt is typically motivated by repayment and stability.
Of course, there are nuances—risk, structure, capital preservation—but this core distinction gives us a simple lens to determine what each type of capital is best suited to fund.
How is Debt typically used
Debt is most used to fund— things that generate steady cash flow or hold collateral value such as, and not limited to, assets.
Example:
- Buying equipment, inventory, or real estate
- Working capital to fund short-term cash gaps
If you’re borrowing to fund a machine that generates $100,000 a year and the loan is $500,000 at 8%, that’s a clear return on assets for the lender and company — and the business owner keeps the upside.
We often work through the math of, if we increased Inventory by, let’s say for example, $5,000,000 considering the company’s current operations, how much would that drop to the bottom line $1M – $3M? How does that change with volume pricing discounts or operational (or no operational) leverage etc. (we will walk through this example in a subsequent post in greater detail).
✅ Typically good for debt: Predictable, cash-generating assets with clear repayment ability
How is Equity typically used
Equity is typically best used to fund enterprise value creation — especially when outcomes are uncertain or long-term.
Example:
- Launching a brand-new product with no historical sales or distribution channels
- Expanding into new markets that do not leverage existing infrastructure
- Investing in R&D or brand development
These uses might not produce near-term cash flow, but they can significantly increase the long-term enterprise value of the business. That’s typically what equity investors are betting on.
✅ Typically good for equity: Long-term growth plays, innovation, or riskier moves with high upside
Which One Is Better?
That depends. If you’re funding something predictable and collateral-backed—debt might be cheaper and more appropriate. If you’re building long-term value and can’t guarantee short-term returns or cash flow — equity might be your only option.
It’s not about what’s “better.” It’s about aligning capital with purpose, and ensuring each party in the structure is getting what they need from the deal and that all parties are aligned with the goals of the company.
But what if you’re trying to do all of the above?
That’s the reality for many companies still in their growth phase. They often have competing priorities: they need to fund working capital, invest in marketing, launch a new product, and enter new distribution channels — all at once. And they may not have the luxury of addressing each item in perfect sequence.
This is where Capvia comes in. While we focus exclusively on the debt side of the capital structure, we help management teams develop a holistic capital plan that aligns debt and equity strategies. In fact, we have seen taking a unified approach to capital planning often times can make it easier to raise both debt and equity —because everyone at the table sees a clear, thoughtful path to value creation and risk management.
If you’re facing one or many of the issues we discussed, let’s talk. We’ve been on all sides of the table and can help you build a capital structure that actually works for your business both short and long term. Click on “Speak to a Rep” to schedule your appointment.