Equity or debt? Choosing how to fund a project

Every growing company and every project sponsor eventually faces the same choice: sell part of the business to raise capital, or borrow it. In practice, many of the best-funded projects use both, in the right order and the right proportions.

What each one really costs

Equity is the more expensive capital if the project succeeds, because investors share in all of the upside. Debt is the more dangerous capital if it struggles, because repayments fall due regardless.

Equity is the more expensive capital if a project succeeds. Debt is the more dangerous capital if it struggles.

What lenders need to see

Lenders are paid back from cash flow, and they protect themselves with security. Before they commit, they typically want:

• visibility of future revenue, ideally through signed contracts or offtake agreements
• evidence that cash flow covers debt payments with room to spare
• assets or contracts that can be taken as security
• a sponsor or management team with a track record
• enough equity already in the project that the owners share the risk

If a project cannot show most of these yet, it is usually too early for significant debt.

Stage decides a great deal

For an energy or infrastructure project, the pattern is often predictable. Early development, including permits, land, grid connection and design, is typically funded with equity, because the risk is highest and there is no revenue. Once a project is ready to build, with contracts in place, senior debt can fund a large share of construction. Once it is operating, it may be refinanced on better terms.

For a technology company, the same logic applies in a different form. Early rounds are equity. Once recurring revenue is established, growth or venture debt can extend the runway without further dilution.

Combining the two

The most efficient capital structures often blend equity and debt. Senior debt is the cheapest money but needs the most certainty. Mezzanine or subordinated debt sits between debt and equity, with a higher cost and more flexibility. Equity absorbs the first losses and takes the upside.

Raising the right amount of each, in the right order, can meaningfully reduce how much of the company founders and sponsors have to give away.

Five questions to ask before you choose

1. How predictable are our cash flows over the next three to five years?
2. What could we offer a lender as security?
3. How much ownership and control are we prepared to give up?
4. What happens to us if revenue arrives a year later than planned?
5. Would a mix of equity and debt lower our overall cost of capital?

How we help

Fortis Arbor Capital runs equity raises and introduces companies and projects to specialist lending partners. We do not lend ourselves. Where it makes sense, we look at both sides together, so the capital a business raises fits what it can prove today.