Capital Raising – Equity vs Debt and What Suits You Best
Equirus
25 Apr 2025 • 4 min read
As your business grows, you will need capital for expansion, product development, hiring, or entering new markets. There are two common ways to raise this capital: equity or debt. Both have their own pros and cons. Choosing the right option depends on your company’s goals, financial position, and risk appetite.
Investment banks help you assess these factors and recommend the most suitable structure for raising funds. They also connect you with the right investors or lenders, and manage the entire process efficiently.
What is Equity Capital?
Equity capital involves giving away a share of ownership in exchange for funds. This could be through private equity, venture capital, or a public listing (IPO). Investors become shareholders in your company and expect returns through dividends or capital gains when they exit.
What is Debt Capital?
Debt capital is borrowed money that you agree to repay with interest over time. This includes loans, debentures, or bonds. In this case, you don’t give up ownership but you commit to regular repayments, regardless of how your business performs.
Key Differences
| Feature | Equity | Debt |
|---|---|---|
| Ownership Dilution | Yes | No |
| Repayment Obligation | No | Yes |
| Investor Control | Possible | None |
| Cost of Capital | Higher (due to equity stake) | Lower (but fixed interest) |
| Ideal For | High-growth companies | Stable businesses with cash flow |
When to Choose Equity?
Equity funding makes sense when:
- You are in a high-growth phase
- You do not have stable cash flows yet
- You need strategic support from investors
- You are building a long-term product with upfront investment
Equity investors are usually more patient and offer more than just money. They bring industry experience, networks, and guidance. But you should be comfortable with giving up some control and decision-making power.
When to Choose Debt?
Debt works better when:
- Your cash flows are predictable
- You need funds for short- to medium-term needs
- You want to retain full ownership
- You can handle fixed repayments
Debt is often cheaper in the long run because you don’t dilute your stake. But it increases financial pressure due to interest payments.
Role of Investment Banks
Investment banks help you make the right capital raising decision and manage the entire process. Here’s how:
1. Assessing Your Needs
They start by understanding why you need the capital, how much is needed, and how soon. They evaluate your current financial health, growth plan, and repayment ability.
2. Recommending the Right Option
Based on their analysis, they recommend the most suitable structure - whether pure equity, debt, or a mix (called structured finance). For example, they may advise using convertible debt if you want flexibility to convert it into equity later.
3. Identifying Investors or Lenders
Investment banks have deep networks of institutional investors, VC/PE funds, NBFCs, banks, and debt funds. They connect you with those who match your business stage and capital requirements.
4. Documentation and Compliance
They assist in preparing detailed pitch decks, term sheets, financial models, and legal documentation. They ensure your business is ready for due diligence and help manage the information flow.
5. Negotiation and Closure
They represent you in negotiations to ensure favourable terms - whether it’s interest rates in a loan or valuation in an equity deal. They work to complete the transaction within a defined timeline.
Structured Finance: A Balanced Approach
Sometimes, a mix of equity and debt works best. For example, you may raise a part of the amount through debt and the rest through equity to optimise costs and retain some control. Investment banks can help structure such customised solutions.
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Things to Watch Out For
- Don’t raise more than you need. It increases cost and may create pressure later.
- Read the terms carefully - especially in convertible instruments or revenue-linked loans.
- Avoid frequent equity dilution, as it reduces promoter holding.
- Make sure you can handle the repayments if you choose debt.
A wrong funding decision can affect your business for years. So, take time to plan it right.
Raising capital is an important step in your growth journey. Choosing between equity and debt is not just a financial decision - it affects control, future earnings, and business flexibility.
With the right investment bank by your side, you get expert advice tailored to your needs. You also gain access to a network of serious investors and lenders who can help you grow on your terms.