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-By Liz Nkukuu

There are two broad ways that people can fund their businesses or investments. They can either borrow money or use equity, in which case it is money put into a business to take risks. Startup equity is the degree of ownership stakeholders have of a company and typically refers to the value of shares that founders, investors, and employees are issued.

As a founder, you want to make sure sharing ownership of your business is done thoughtfully and productively. This comes with no assured return but the investor is looking at participating in the overall profitability of the business.

Some of the key sources of equity include personal savings and investments, friends and relatives, angel investors through various platforms including but not limited to crowdfunding, private and public share sales.

Funding through debt is basically getting a loan for a business at a pre-agreed cost (interest) depending on other terms and conditions. These funds can be sourced from both formal businesses like banks and Saccos or from more informal sources like supplier credit.

The wealth creation journey cannot ignore debt as it is one way to easily multiply the overall value of an individual’s portfolio if well utilised. The key thing when taking debt is understanding the venture well enough to ensure it can sustain the cost of debt in terms of return and also cashflows from the said business.

Key considerations when seeking debt or equity

Business Type: Some sectors attract more debt funding compared to others let us take an example if you are in real estate you are able to raise up to 60% of the capital required from debt but whereas in sectors that changes fast like technology the ability to attract debt might be limited. One should therefore seek to understand the key players who can fund their various types of ventures. Understand the available options and products in the market. One can start by looking at any cheaper options that would include subsidized loans through the various business agencies before jumping dip into commercial loans. Even for commercial loans knowing the various types of facilities offered by various banks helps in making the right decision.

Business stage: Businesses go through the various maturities stages and it is good to know what kind of funding works at each stage. When you are starting out most of the funding comes in the form of equity. Most investors who lend money here would like participation of equity as they are taking more risk. Being able to balance between seeding control and the need to get funding is the driving force here.

 Amount of cash required and the time horizon of when the cash is needed: Knowing the value of the cash required and for how long the cash will be required helps in narrowing one’s options on the facilities that they can approach the financiers to give. It is always good to ensure that we are matching the cash flows in terms of both amounts and timing. For short-term working capital, one can consider overdraft facilities but for cash-intensive long-term projects, one should go for long term loans.

Team’s capacity: Financing is a key pillar of any business and it is for this reason that one might not fully outsource this skill out of the business. When one is getting into complex transactions it is always advisable to call in the help of professionals as this will not only help in the identification of potential challenges but also help in negotiations with the counterparties. Mistakes to avoid when taking debt instruments While debt is all good, however, one should always aim at getting it all right, below are some of the key mistakes we should try to avoid at all times.

Taking debt to speculate on new ventures: Debt should be used for business expansion and never for speculating on new ventures unless it is a friendly debt from the close cycle of friends. When things do not work out you still have the debt to pay. Not creating boundaries between personal and business debts: For most entrepreneurs, there is usually a challenge in separating these two and one confuses the business having money with them having the cash. Always good to create different accounts in business as suggested in the profit first book.

Delayed servicing of debt: When we miss any payment, we get ourselves into significant challenges as catching up with the repayments may be a big challenge. Too much leverage: The same way that we might not borrow ourselves out of recession as a country even as a business and individuals, debt can be suffocating and so one needs to work on key debt targets to ensure that we keep ourselves in check.