Pros & Cons: Equity Vs. Debt Financing

Pros & Cons: Equity vs. Debt Financing

I know that we had discussed this before. I just wanted to add this in case you needed to say why you chose one over the other in your paper. My personal recommendation would be debt financing. In our industry, the inventory costs are low, overhead is low, and the ability to achieve profit is fairly easy. With that being said, it’s usually easy for companies in this industry to make their loan payments. Plus, this way (debt) doesn’t involve handing over a percentage of ownership in your business.

Equity:

• Pros:
• If you can’t afford to add debt to your business, there’s no requirement for payback.
• Investors give you the ability to have cash for expansion, sometimes immediately.
• Networking advantages of adding investors to your company’s portfolio.
• Cons:
• Finding investors that fit in with the vision/mission of your firm can be a lengthy process.
• Equity financing with investors involves giving up a percentage of the company.
• The investors are included in any decision making for the company.
• Sometimes the percentage of equity given up is more than what it would take to have loan payments (debt financing).

Debt:

• Pros:
• You run your company with your vision, and no input/decisions from investors.
• No ties to the lender once the capital is paid back
• You can plug the payments into your operating budget
• The interest paid on your loan is tax deductible
• There are multiple options out there (i.e. short term, long term, etc.)
• Cons:
• There’s a set time period for the capital to be paid back to the lender
• The assets of the company can be used as collateral for the loan. As company owner, you will most likely have to guarantee the debt personally (making yourself liable).
• If the company has cash flow issues, it can lead to problems making the payments.

Some info on the potential capital expansion of a Landscaping company in the Pacific Northwest.

• Average Cost of Inventory:
• Riding Mowers: $4500.00--$6000.00
• Push Mowers: $500.00--$600.00
• Weed-Eaters: $250.00
• Blowers: $200.00
• Trailer: $1200.00

• Average Hourly Rates:
• Typical Lawn Maintenance: $40.00

• Example income:
• 25 residential accounts: $16,000.00/yr gross income
• 5 commercial accounts: $21,000.00/yr gross income
• $37,000.00 gross income.

My recommendation for your business in your paper:

• Since you’re attempting to expand your business, the best thing that can happen to a landscaping company would be creating better efficiency. The work that we do can be time-consuming, but needs to be if certain plants/lawns need it. The efficiency for companies like this comes in the form of better (more efficient) equipment. While most people start with lower level equipment, my main recommendation would be a commercial zero-turn riding mower. These allow the worker to essentially cut their time in half and utilize that saved time for other tasks.

How this improves your business financially:

• Becoming more efficient in your operations will help any business. Becoming more efficient in the operations of a landscaping company opens up many opportunities. In doing so, the time saved by using efficient equipment such as the commercial zero-turn mower allows the company to use that time to either: (a) complete other tasks required at the jobsite, or (b) use that time to complete other jobs/new jobs. Time is money, as the saying goes.