Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsDeciding Between Debt and EquityDuring economic uncertainties, you may wish toreduce the financial risk of taking on significant debtfunding (it may also be difficult for you to raise debtfinance). Therefore, you may need to be preparedto share the ownership of your business to increasefunding.You may also want to consider a combination ofdebt and equity funding to meet the businessrequirements. An investor may be prepared toprovide both equity and debt finance.HINTIn deciding whetheror not to seek anequity party, youneed to considerboth the fi nancial andnon-fi nancialoutcomesConsiderations in selecting equity investment as your finance option mayinclude:• The ability to recognise an external investor’s interests in operating thebusiness;• Your attitude to losing a 100% control position and power to make alldecisions without consulting other owners;• Identification of skills of potential investors that would be advantageous tothe growth of the business;• The need to reduce the risk associated with the gearing level of the businessthrough lower interest and principal repayment commitments;• Long-term plans for succession and, if it is a family business, the impact onother family members;• Willingness to identify an appropriate exit strategy and its impact on you;• The opportunities equity funding will bring that could not be achieved withexisting debt available to the business;• Whether your business is attractive to an investor;• Whether you have prepared the necessary fi nancial statements andforecasts that a potential investor will want to see; and• How quickly you need the funding.91chapter 7-13 p79-181 Eng.indd 918/15/11 5:02:55 PM