Searching for capital is costly and time-consuming. Assuming a business is financially stable, when should they consider selling equity vs. taking on debt?
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I will focus on equity financing since, there are many reasons to bring on debt such as equipment financing, a credit line to smooth out cashflow, etc. I think the key question to ask yourself is what you are going to raise the money for? If you raise equity financing, you are going to be giving up part of the ownership of your company and, most likely some control. If you can achieve significant growth by raising equity financing and thus make your smaller equity ownership worth more, then it is a good time to seek capital. Also, if you need to raise capital to maintain a competitive advantage, that is also a good reason to raise capital.
Equity vs. debt financing. Definitely a difficult question to answer as the number of variables impacting the answer inevitably leads to an opinion and nothing more. That being said, however, assuming the company is financially stable, and currently does not have any outstanding debt to service, I woud imagine that equity would be a reasonable approach. Company valuations are always impacted by debt service and that can hurt valuation if you decide to pursue equity afterwards. The most informed opinion would be based upon factors such as the company's stage (startup, emerging, plateau, declining etc.), goals of current ownership, future demand outlook, competitive landscape etc. Equity can be sold to raise capital to such a degree that it would not impact the decision-making capability of existing owners. Additionally, in any adverse company event such as bankruptcy, debt holders generally receive payment during liquidation proceedings before any shareholders are compensated; including founders, majority shareholders etc.
Not a VC expert, but each business should know their financial reputation. If vendors, partners, and competitors can see your business credit report, it should be properly monitored.
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