Understanding the funding landscape is important when seeking cash for your business. Terms such as debt and equity are commonly used when funding is being discussed.
In short, when an investor wants equity for their investment, they expect a percentage of ownership in exchange for their financial commitment. As your company grows, the value of their investment grows.
Conversely, when an investor or bank loans money and with a payment schedule over a pre-determined length of time, this is debt-based lending. With debt-based lending, you only pay back the loan amount, plus interest, regardless of how your company performs. If your company grows in value you will not owe more to your debt-based lender, unlike equity investment, which increases in value as your business value increases.
See the chart below to better understand the difference of debt-, equity- and grant-based financing.