Equity and Debt Active Reasoning

Equity and Debt

Active Reasoning is a startup company selling business-to-business software. The company requires funds for two purposes. First, it immediately needs $30,000 for a new server for software development and software quality testing. Second, it requires $10 million dollars in funds to support continuous operations. Active Reasoning has been in business for 2 years and was started with equity from the founder and CEO. Early this year, Active Reasoning delivered product to market and initial reception has been good. To date, the company has attracted five major clients that have brought in revenue of approximately $2.5 million. However, the company is not yet profitable and would like to ramp up its operations more quickly now that it has proven that its initial product concept has traction in the market. One of its clients has asked for support for a new platform for which Active Reasoning's product does not support. Because the client has promised significant future investment in Active Reasoning's solution, the company would like to accommodate the request for the server support, but will first need to acquire the server.

To purchase the server, Active Reasoning should pursue debt financing. "Debt is most often used to fund a specific project or initiative that has an identifiable implementation time frame." (Small-business financing: Debt vs. equity) the funds for the server are needed now and debt financing will be much quicker and easier than equity financing. Although Active Reasoning will be expected to meet regular monthly payments of principal and interest for the server (What are the advantages and disadvantages of debt financing? (2007), the company expects that it will soon obtain equity financing as discussed below. According to this same source, timely repayment of this loan will enhance Active Reasoning's credit rating so that it will be easier to obtain financing in the future.

For the $10 million dollars in funds to support continuous operations, Active Reasoning will pursue equity financing. "While equity financing can be used for many different purposes, it is usually used for long-term general funding and not tied to specific projects or time frames." (Small-business financing: Debt vs. equity) Venture capital is a better route than an initial public offering for an early stage startup such as Active Reasoning that lacks the size and stability required for becoming a public company.