It is important to understand the difference between debt and equity finance before you approach investors.
Debt funding
Debt funds include loans, leases, bank overdrafts and terms of trade.
When a bank or other lenders loan you money, they expect their money back in the form of regular repayments, plus interest for the use of this money. However, they have no further claim on your business or its profits. In other words, they have no ownership stake in your business beyond the recovery of the money they have advanced. The shareholders take all the risk and all the rewards.
Equity Funding
Equity funding is money invested in a business that does not incur interest or have to be repaid. Equity investors such as angel and corporate investors and venture capitalists are prepared to forgo regular repayments of their money and to risk losing their capital if your business fails.
However, if it succeeds, they stand to gain the return of their capital plus a share in the profits and the improved value of your business. You are giving them an ownership stake in your business. In return for development capital and the expectation that their equity stake will rise in value significantly. Due to this increased risk, equity investors seek far higher returns and will scrutinise your business to minimise risk.
