Hunter Hebert, CEO of London Financial Capital's view of Debt vs. Equity Financing

What is the real difference between Equity Financing & Debt Financing?

London Financial Capital LLC. http://www.londonfi.com has been dealing in these markets for some time. Below is a brief explanation from Hunter Hebert CEO and Douglas Schulman CFO of the differences, benifits and pitfalls associated with these types of funding options.

By definition debt financing is: When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.

By definition equity financing is: The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation.

Debt financing is what we like to call collateral intensive and is backed by the credit of the individuals/businesses that are borrowing money. This makes it challenging in today's credit market for businesses or projects to get funded. The need for borrowing money is because the individuals/businesses do not have enough capital to accomplish there goals. That being said since these types of financings are demanding what these individuals/businesses lack "collateral" it always seems to me strange that this is always the first place that individuals/businesses look for money. One reason for this is because individuals/businesses do not know any better they are under the impression banks are there to make loans. This is partially true, banks borrow money at short term floating rates and then loan that money out to consumers at much higher rates than it costs them to borrow. Banks need collateral for this reason to protect the money that is lent out since they are lending out borrowed funds. They almost never value collateral properly it usually undervalued for their benefit and since they have the money they must be right. This is why they are not the right institutions to borrow funds from.

Equity financing is much different from the above; while equity financing can take many various forms there are some underlying themes that remain the same. We are going to talk about the private placement market right now; the private placement market is one of the best methods of getting your business/project funded in this current economic climate. The main reason is due to who is buying these private placements. Life insurance companies and pension funds are the largest buyers of private placements they do not borrow money they take in cash deposits from retail consumers and they do not keep that money idle. They have the ability to keep their investments out for longer time frames earning on a modest rate of return, this is a huge advantage to the Individual/Business that it is invested in since banks do not like to loan out funds for long durations. Also since there are covenants written into the loan documents that in a debt financing transaction can not be broken or you are in default it makes it extremely challenging to change anything after the fact. On the contrary in private placementsthose covenants are expected to be broken and it is acceptable as long as it benefits the overall project/business.
What is a better method of funding? I will leave it to the eye of the beholder. As a borrower here are a few links to the London Financial Website for more info.

http://londonfi.com/borrower.html

http://londonfi.com/broker.html

http://londonfi.com/about.html

http://londonfi.com/index.html

http://londonfi.com/forms.html

http://londonfi.com/contact.html

An excellent study was done by the Federal Reserve and can be downloaded here.
http://www.federalreserve.gov/pubs/staffstudies/1990-99/ss166.pdf