Debt vs. Equity Offerings

The Difference Between Debt and Equity Offerings

 Do you want investors? The very first thing you think of is how to get your company listed. If not this, you want to get an equity (or ownership/profit interest) investment. Why not consider getting equity or debt offerings?  Debt financing is when you raise money by borrowing from investors with a promise to pay the principal and interest; both parties agree on terms of payment. Equity financing is when you borrow money, and in exchange, you offer a share of the company as payment for the “loan.” We’ve gone into the details below.

Debt versus Equity Offerings

Debt vs. Equity Offerings

Debt Offerings

Debt offerings are just that: you are borrowing money (with an interest payment like any other debt) from investors with a promise to pay. It’s also important to note that debt offerings can involve the sale of promissory notes, bonds, and debentures. Although a debt offering is different from an equity offering, they are subject to the same securities laws as equity offerings, both at the federal and state level.  

Investors in a debt offering are lending money (investment) for a return of principal and earn interest on the investment. The interest payments can be made quarterly, monthly, or biannually based on a pre-agreed schedule. There can be exit fees, balloon payments, and virtually any other term you would see as part of a typical debt. 

All investors in a debt offering may be purchasing the debt interests at the same terms. In some cases, investors acquire debt interest in the same investment but on different terms. By the time you are making the deposit, you should already have information on the interest rates, type of debt purchasing, maturity dates, fees, and any other important information as a prudent investor.

Equity Offerings

An equity offering is the most common type of securities offering. Securities offerings are used by companies to raise funds to cover operation costs, expansions, acquisitions, or other business-related purposes. In this case, the loan is more of a buy; the investor (commonly referred to as an Equity investor) is buying into the company. Corporations will sell stocks; limited liabilities will offer membership interest/units; while limited partnerships will offer limited partnership interest/units as payment for the investment. The investor in an equity investment typically receives a form of ownership in the company. 

Equity investors may have voting rights, but this is not an absolute right as some may be non-voting interest holders. Some investors may be profit interest holders or interest holders with limited or short-term ownership rights. Such as the right to inspect books and records, receive distributions, and vote in a capital call. Some equity investors may prefer special arrangements like a return of capital (ROC) distribution or any other arrangement that allows them to cover their expected interest on the investment.

Different Types of Investors

Both debt offerings and equity offerings are good investments (for both the company and the investor) depending on the circumstances and your preferences. Some investors feel safer investing in or advancing debt offerings. Others find the potential of an equity offering investment’s returns, which is often riskier and involves longer investment commitment, more attractive. Either way, both types of investments have one thing in common; returns.

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