Start with the funding gap, not the product
Assume a project needs 100 units of capital. The bank provides 60, the sponsor contributes 20 and another 20 must come from elsewhere. One option is a new shareholder. Another is additional debt, provided the senior lender accepts its place in the structure.
Do not compare an interest rate directly with an equity percentage. Compare the total debt cost, prepayment terms, security, investor rights and how proceeds are allocated on sale or refinancing.
An example: the same funding, different consequences
An investor contributes 20 units and, under this illustration, receives 20% of a distributable profit of 30. Their profit share is 6. That is not a full valuation. Return of capital, payout priority, loss allocation and any governance rights still have to be agreed.
Alternatively, a loan of 20 units over two years at an assumed 12% simple annual interest generates 4.8 in interest. A 2% upfront fee adds 0.4, for an illustrated total cost of 5.2. These are hypothetical figures, not market rates or an offer.
The initial difference is 0.8. Extend the loan to three years and interest plus the same fee reaches 7.6, before other charges. Ownership scope matters too: an investor in a project SPV may exit when the project is completed, but their rights end only under the agreed terms. A stake in the operating company may create a much longer relationship.
What changes when the timetable slips
Debt does not stop accruing cost because construction has slipped. Interest may keep running, and the documents may include extension or default charges. Any credible comparison needs a delay scenario.
Equity generally does not impose the same scheduled repayment obligation as debt. In return, the investor participates in the economics and may receive a say in decisions. That is a different allocation of risk, not free flexibility.
Some investors also contribute commercial relationships, development experience or access to future opportunities. That value cannot be captured by a financing-cost table alone.
The terms that can change the outcome
Review repayment priority, security and senior-lender consent. If the loan documents and intercreditor terms do not fit together, an attractive structure on paper may not be executable.
Check maturity, minimum return, fees and the price of early repayment. Paying back sooner does not always reduce the total cost proportionately.
Examine covenants, default provisions and any right to convert debt into equity. Mezzanine does not automatically mean zero dilution. The documents decide.
Make the decision across scenarios, not one headline number
Model the base case, a delay and weaker sales. Then compare the cash each structure requires, when it becomes payable and which rights you give up. Only then can you judge which form of capital fits the project.
