They say there’s no such thing as a free lunch. Sadly – there’s no such thing as free money either.

For startups, scaleups and other tech-enabled businesses, there are several ways to fund growth, including bootstrapping and grants and subsidies, as well as equity funding and non-dilutive debt funding. 

Every option comes with its costs, challenges or stipulations. It’s important to understand the expectations attached to that capital, as well as choice, optionality and opportunity cost in terms of time.

The Cost of Capital calculator has been created to enable you to compare the costs of Tractor’s non-dilutive debt funding with the costs of equity funding, over the course of seven to ten years. 

That’s not to say a business should always choose one or the other – debt and equity can work side by side throughout a company’s lifespan, at different times, in an elastic rhythm for different use cases.

What’s key, however, is to understand the long-term costs of capital.

Disclaimer - *These calculations are an estimate only, intended to act as a guideline.

Debt and equity: What’s the difference?

Debt funding is repaid within a defined period, plus interest, while equity funding isn’t repaid at all – investors buy a percentage of the business, and achieve returns through increased value over time.

With non-dilutive debt funding from Tractor, costs are transparent and understood from the outset, and there’s no extra baggage or expectations. The relationship can be short-term, or continual – 33% of Tractor companies come back to refinance.

Equity investment offers a longer-term relationship. Investors take on more risk, and – as they stand to benefit from success – they’ll often pitch in as advisors.

Weighing up the costs of capital

With equity funding, the big cost for founders is dilution of ownership – founders who raise multiple times can end up retaining just a small slice of the business, meaning their exit is less lucrative in the long run.

On the other hand, a business may not have grown to the point of exit without raising equity capital – funding at the right time can supercharge growth, leading to a higher valuation down the track.

For others, the benefits of equity funding might not outweigh the costs. Here, debt funding can fund short-term growth initiatives and help businesses scale to their next phase of growth.

Not every tech-enabled company is suited to equity funding or VC-backing, and founders and decision-makers should think carefully about whether they want to go down that route – now or ever.

A combination of debt and equity funding for different use cases and at different times can also set a tech company up for optimal growth, on the terms founders are most comfortable with.

But getting a sense of the costs involved can help founders make the most savvy and strategic decision that’s right for them, at the right time.

Other (non-financial) costs to consider

By giving up equity, founders also give up an element of control. Equity investors often take a board seat, and so have a say in the direction the company takes going forward. 

Many founders also spend a lot of time on fundraising – taking meetings and travelling, for example – time that could be spent growing the business and generating revenue.

These kinds of costs are hard to quantify, and often come down to a judgement call, unique to the company, its founders and their risk appetite.

Case study

Startup: Cartelux

Founder: Joshua Williams

Location: Sunshine Coast, Queensland

Cartelux started out as a media management agency, headed up by founder Joshua Williams – and it was successful. 

But when Joshua identified a gap in the market, he pivoted almost overnight to become a SaaS platform helping brands create, produce and measure their own digital marketing campaigns.

Initially, the change of direction (and pace) was funded out of the founder’s own pocket, and through investment from family and friends who backed his vision.

Once the new model was gaining traction, funding from Tractor allowed Cartelux to make some key hires and maintain momentum, ultimately proving the platform worked at scale.

According to Joshua, it made “all the difference” in getting the business from that early funding stage to a $3 million Series A round. 

“It was absolutely critical to our journey.”

What’s next?

Still considering whether equity funding or non-dilutive debt funding is the right choice for you? Contact our team for a chat about what Tractor Ventures could offer.

To better understand the costs of Tractor financing, take a look at our business loan calculator, and business loan repayments calculator.

Find out more about the benefits of being part of the Tractor Village.

Discover more case studies from Tractor companies.

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