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Everybody wants an investor, but probably wouldn’t know what deal they would be willing to offer if the opportunity arises. If you eventually decide to take on a business partner likely it is because they shine in an area where you lack and in most cases that will be financing when concerning a young designer.

If an investor or partner decides to work with your company and provide financing they are not doing it out of the goodness of their heart and in no way am I telling you to go out looking for an investor in the early stage of financing your apparel business, because I think it is a big mistake most will overspend and have all this capital, but nowhere to put it or better yet don’t have a clue of where it goes.

When you gain financing you have to be ready to distribute the money to where it needs to go in order to get your investor a return on his investment as quick as possible, but that also depends on what type of financing you have obtained that is where equity and debt financing become part of the equation.

Debt Financing sounds exactly like the term. Your business will take on debt in order to acquire (borrowed money) financing that you will have to pay back with interest which would most likely come in the form of a bank loan or money borrowed from an individual that you would pay back in monthly installments. Usually businesses take on debt financing to purchase materials or equipment they may need in-house or an unexpected rush in orders and quick financing is needed.

I would suggest if you take on any type of debt financing that you have a well thought out business plan that includes the amount of financing you need to attain, plus the rate at which you will have to pay it back and the interest. Otherwise you may find yourself in the hole staring at bankruptcy and hounding creditor calls. For most bank loans unless you have great credit you will have to put down some collateral or have a guarantor/co-signor to obtain the loans. You do know what happens if you don’t pay back the loan and you have your personal belongings down as collateral….

Another upside is that the interest paid on the loan is usually tax deductible so keep that in mind for the future. On the other hand debt financing can be less trouble, because you don’t have to deal with anybody trying to run your business or giving you their two cents. All they want at the end of the day is a return on their investment.

It is essentially better business wise to have more equity than debt while operating your business and any investors you take on will take note of your debt to equity ratio.

If you obtain Equity Financing be ready to give up some control and ownership of your business. Equity financing usually comes along the way of a venture capitalist or potential business partner. Right off you can see some of the advantages and disadvantages of equity financing one being that you don’t take on any debt and if you see it this way you have someone to take the load off of your back.

You will have to give up some ownership and share profits with equity investors, which may not seem like much when you’re in need of cash flow, but once your company actually starts seeing a return your partner will receive whatever percentage of the profits you offered them in the deal.

Another problem that I could see arising between partners and I have experienced this first hand is that you often have different thoughts and ideas or your opinions clash. This can really create frustration and speed up the burnout process in a business relationship. When taking on a partner or an investor make sure they have similar plans and expectations out of the business and where they would like to see it in the near future.

I would suggest you work with an investor or partner that has a track record in the apparel industry so that they already have an understanding of how the business works and don’t have any false pretenses.

I guess you can say I took on debt financing when starting Scout Union Apparel and my other ventures, because I took out extra money for college and used the refund checks to finance my businesses. I already had partners in my pockets so equity financing was definitely not an option at that point, but I never know where the road might lead me and that may be a possibility in the near future.

Leave your thoughts. What is the better alternative debt or equity financing and why?

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