Moving beyond equity! How startups shift to debt financing fuel business growth?

livemint.com:

startups to foster growth and achieve sustainability. Traditionally, equity financing has been the go-to option for many young businesses. However, amid a significant dip in equity fundraising, they are now turning to debt financing as a viable alternative to fuel their growth.

This shift shows a better grasp of diverse financial strategies that support a startup’s growth without diluting ownership.Before diving deep into them, let us understand the difference between equity and debt financing. Equity financing involves raising capital by selling company shares, which dilutes ownership but doesn't require repayment, while debt financing entails borrowing money that must be repaid with interest without giving up ownership but adding financial liability to the company.Debt funds have many advantages as founders can retain control of their decisions and future financial benefits, said Avishek Gupta, MD and CEO of Caspian Debt. Besides this, the overall cost is lower with fixed interest rates, flexible repayment schedule, and quicker to get access to debt funds, he told LiveMint. Gagan Aggarwal, CFO of Clix Capital, stated that founders can also reduce tax outgo since interest payments are business expenses.

He said that easy budgeting due to monthly repayments and timely repayment of debt borrowings strengthen the bureau score, making it easier to take additional borrowings for growth and at better rates. However, the industry players noted that some risks and challenges are also associated with debt funds. “Excessive leverage can increase financial risk and strain cash flows.