Money Ain’t the Same

In other words, money is not fungible.

Debt vs. Equity. I know, this might seem overwhelmingly obvious to many, but I am still amazed at how many business owners don’t really understand the difference between debt and equity.

·      Debt - borrowed money that must be repaid with interest. Examples include bank loans, lines of credit, and credit cards. The advantages are that it allows you to maintain ownership control and the interest is often tax-deductible. The disadvantages are that it requires regular payments, and it increases your financial risk such that you could lose control of your business if you are unable to meet the terms of the debt. Debt is less expensive than equity.

·      Equity - represents ownership in the company. Examples include personal investments, angel investments, venture capital, private equity, and public equity. The advantages are that it usually does not involve a repayment obligation and it allows you to share risk with other shareholders. The disadvantages are that it dilutes your ownership percentage and may involve giving up some control. Equity is more expensive than debt.

Other Distinctions. Beyond the debt vs. equity distinction, there are many other factors that makes one type of money non-fungible (i.e., not readily interchangeable with other forms of money). They include:

·      Regulatory and legal (e.g., restrictions on use of the money)

·      Tax (e.g., deductibility, credits)

·      Contractual (e.g., restrictions on use of the money) 

·      Logistical (e.g., credit card, cash)

·      Technical (e.g., crypto currency, blockchain)

Study the Distinctions. This work is not broad enough to be a useful guide to all the distinctions between the various forms of money. But I strongly recommend understanding the implications of every form of money you will be employing and hiring experts to advise where the “water is too muddy.”

GROW and SELL Advisors, wholly-owned by Traversi & Co., LLC, is a premier sell-side M&A advisory firm – a boutique investment bank – serving the lower middle market.  Visit us here.

For a short video clip on this topic, click here.