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Debt vs Equity – Are you a Moron?

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July 1, 2013

4330340_HiResBy Bob Coleman

Editor, The Coleman Report

Anybody who starts a business with borrowed money is “a moron.”

So says Mark Cuban. And New York Times blogger Ami Kassar doesn’t like the characterization.
Ami writes, “There are three ways to finance the start of a company: one is by giving away equity, another is by taking on debt, and the third is through personal savings. It is one of the trickiest and most personal decisions an entrepreneur has to make, and the decision can change as a company begins to grow and evolve. Personally, I strongly disagree with Mr. Cuban’s black-and-white assertion, and I fear that he, as an icon of American entrepreneurship, is doing a disservice to hundreds of thousands of entrepreneurs who look up to him. Decisions about how to finance your company can be tough — and filled with lots of gray.”

Cuban’s argument is the banker doesn’t care about the business – only the monthly check.

However, Ami’s argument that equity partners are more intrusive than debt holders is the strongest one.

“I also believe there are millions of small-business owners who elected to take the path less traveled and decided to keep control of their companies and not have outside investors constantly looking over their shoulders.”

What do you think? Which is the better formula for success? The “silent” bank debt partner who only wants repayment – remember the scene from mobster collector in the mob move Goodfellas? “Fire?  Tough Pay me”, or the equity investor who can remove you for doing the right thing?

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