Debt vs. Equity: Choosing The Right Capital Structure For Scaling Your DTC Brand

The $292-Billion-Dollar Elephant In The Room

Scaling a consumer brand is hard. ‍

Whether you're bootstrapped or going out and raising capital, building a brand in 2025 is not the same as it once was. And that's not to say it was ever easy to build the legacy brands we all now know and follow, but the game on the field looked a lot different in the pre-COVID era than it does today.

Building a brand today requires getting a lot of small stuff right. Making sure all the details are accounted for, that all the tiny pieces click into place; from product to fully landed costs to unboxing experience to new customer efficiency metrics. And even then it still may not always work.

Everybody loves talking about ads. Ad channels, ad accounts, ad spend, ad creative, and everything in between. And while none of us would be here without the ad platforms that drive demand and create distribution for us, almost nobody is talking about the $292-billion-dollar elephant in the room: how do we actually fund all this growth? 

(And yes, I'm using Shopify's 2024 GMV to illustrate my point here. Bear with me).

If you're an e-commerce brand scaling at a double digit CAGR, going out and acquiring new customers is no longer your biggest constraint. It may be a constraint, and you may not be first-order profitable, but that's not what's stopping you from spending more on ads.

Your real constraint is capital, and more specifically, inventory-related working capital. This is the capital that allows you to reinvest in growth; the capital that funds your next PO so you have the stock needed to keep up with the growth trajectory you're on.

One of the most impactful decisions you'll make as a founder, CFO, CMO, or Director of Growth will be how to finance this growth properly.

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"What is my free cashflow margin?" 

"What is my cost of capital?"

"Should I take on debt, give up equity, or a mix of both?" 

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And while these are all the right questions to be asking, knowing which answer is the right one to follow is often a lot more fuzzy. That's where understanding capital structure comes into play.

Why Does Capital Structure Matter?

The game of business is a game of resourcefulness, not resources. Every business has some finite resource; whether this relates to time, talent, or capital, the task of a good operator is to effectively allocate finite resources against an infinite set of possibilities.

In the case of most DTC brands, the finite resource is the operating cashflow to continue financing growth at scale. Free cashflow in an e-commerce business is hard to come by, especially if the brand is very new-customer revenue dominant. Depending on the revenue versus fixed costs, this can mean that the contribution margin after ad spend costs is just enough to cover the fixed costs of the business, without a lot of cash left over to finance the next cycle of growth.

Brands that have a high customer lifetime value (LTV) generally have a higher intrinsic growth rate; this is because they generate on average a higher contribution margin per order than brands that are entirely dependent on new customer revenue, which is predominantly ad spend driven. This bifurcation of new customer and returning customer revenue allows brands to operate at a higher free cashflow margin, ultimately allowing them to reinvest faster into new inventory and ad spend to continue funding growth.

However, free cashflow can only take you so far on its own. Even the most efficient brands rarely exceed 10-15% in free cashflow margin, and for high-growth brands this can be closer to 0-5% when all is said and done. This is where external financing can be very helpful in keeping up with the growth, even if gross margins are healthy and the brand is operating efficiently.

Debt vs. Equity: What's The Difference? 

There’s almost no shortage of opinions on debt.

DTC Twitter, LinkedIn hot takes, and finance gurus all have something to say. Some swear by the “never take on debt” philosophy, while others insist that equity is the most expensive money you’ll ever raise. The truth? It depends.

Let’s break it down.

Debt financing means borrowing money that you’ll have to pay back at some cost ie interest. This can come in the form of traditional bank loans, revenue-based financing, merchant cash advances, or asset-backed lines of credit (ABLs).

The benefit? You retain control. No dilution, no new board members, full control over your vision for the brand. The downside? You’re on the hook for repayments, and if your margins are tight, the wrong debt structure can quickly choke your cash flow.

Equity financing, on the other hand, is when you sell a piece of your company in exchange for capital. You don’t owe anyone monthly payments, and in some cases, you gain strategic partners who can open doors you wouldn’t have access to otherwise.

But there’s a catch: equity isn’t free. Every percentage point you give up today could be worth 10x more down the line. After all, you're building a business that's (hopefully) going to be worth more tomorrow than it is today. Who wouldn't want to hold onto that? Dilution is real, and if you’re raising capital, be sure you're growing into a valuation that clears the pref stack.

So, how do you decide?

The answer isn’t as black and white as some people like to make it seem. The right move depends on your business model, your cash conversion cycle, your growth trajectory, and most importantly, your ability to execute.

Some brands thrive on equity funding, using it to scale aggressively and capture market share. Others leverage debt to maintain ownership and fuel growth in a capital-efficient way. And the most sophisticated operators? They understand that it’s not an “either/or” question; it’s about structuring capital in a way that aligns with the long-term goals of the business.

Understanding Debt Financing

Debt financing is one of the most powerful tools in your arsenal (if you use it correctly). While debt can unlock a new ability to scale faster, the wrong structure can just as easily sink you.

At its core, debt financing is simple: You borrow money, you pay it back (with interest), and you retain ownership of your business. No dilution, no giving up control. The key question: How much is that capital really costing you?

The Different Forms of Debt Financing

Not all debt is created equal. And in the e-commerce space, there are a few key types you’ll come across:

• Traditional Bank Loans: The old-school option. Banks offer term loans or lines of credit, usually at lower interest rates than alternative lenders. The catch? They require strong financials, collateral, and often a personal guarantee, making them a more difficult option for newer businesses to access.
• Revenue-Based Financing: You get upfront capital in exchange for a percentage of your future sales. No fixed payments, just a cut of revenue until the loan is repaid. Good for businesses with fluctuating cash flow, but can get expensive if growth stalls.
• Merchant Cash Advances (MCAs): A quick way for merchants to access capital in a cash crunch. Lenders front you cash and take a percentage of daily sales. However, the faster you scale on the revenue side, the higher your effective interest rates become, making this one of the most expensive options.
• Asset-Backed Loans (ABLs): Loans secured against your inventory, receivables, or other assets. Since they’re backed by collateral, they tend to have better terms than unsecured loans. ABLs typically have a 40-80% loan-to-asset value depending on the asset liquidity that is serving as collateral.
• Supply Chain & Inventory Financing: Designed specifically for brands that need to fund large purchase orders. You get cash to pay suppliers, and repayment terms are structured around your inventory turnover cycle.

Comparing Equity Financing

Different financing structures can work differently in different "seasons" of the business. For example, a new brand with that's single-channel, has no receiveables or capital assets to collateralize, or limited financial history may have a more difficult time accessing credit from a traditional lending facility. This is where equity financing can be very useful, especially when done with the right strategic partner.

Equity financing can provide significant capital and bring in strategic partners who add value beyond just money. The downside is dilution, and the cost of equity can be high since you’re giving up future value today. Unlike debt, there are no fixed repayments, which can ease short-term cash flow constraints, but in exchange, investors now hold equity in your business.

For e-commerce brands looking to scale aggressively, equity funding can be a great solution to access growth capital and capture market share quickly. It can help support funding of operating activities in the early days, or provide capital to fund POs when traditional debt or inventory financing is not available. It can also allow businesses to make long-term investments into product development, strategic partnerships, or hiring of key talent without the immediate pressure of debt service payments. But for founders who want to retain control or maximize their ownership stake, equity is an expensive form of capital.

Similarly to debt, not all equity is made equal. Depending on the stage of growth you're in can dictate the structure of your equity financing; structures can vary from selling common shares to preferred shares, or convertible notes all the way to later-stage financing deals through recaps and minority PE deals.

How To Choose The Right Capital Structure For Your Business?

Financing growth is one of the most critical decisions founders, CFOs, and growth leaders will make. The key is understanding the true cost of capital, whether it’s in the form of interest payments or dilution. Capital structure is not a “set it and forget it” decision, and there is no single right answer. The best operators are constantly reassessing their financing strategy based on their business needs, cashflow, and long-term vision.

What works for a $1M brand is different from what works for a $100M brand. The best operators understand how to leverage free cashflow, when to take on debt, when to raise equity, and how to balance all of the above to scale efficiently.

At the end of the day, raising money isn’t the hard part, deploying it efficiently is. The brands that win aren’t the ones that raise the most; they’re the ones that make the smartest capital decisions along the way.

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If you liked this post, check out this one on how free cashflow plays a role in growing your DTC brand.