Every company that wants to grow eventually faces the same question: where will the money come from? A new plant, the acquisition of a competitor, expansion into another state — all of this costs more than day-to-day cash can usually handle.
At bottom, there are only two paths. Either the business owner brings someone into the business by selling part of it, or the company borrows money and pays it back later, with interest. The first is called equity. The second, debt. And the place where both happen on a large scale is the capital market.
This article explains, without jargon, how each path works, what DCM is and how it differs from a bank loan.
What the capital market is
The capital market is the meeting point between those who need money to invest and those who have money to put to work. On one side are companies. On the other are investors: funds, insurers, pension funds, banks and also individuals.
The difference from traditional bank credit is who does the lending. With a bank, the company negotiates with a single institution, which lends from its own balance sheet. In the capital market, the company issues a security — a share or a debt instrument — and that security is bought by many investors at the same time.
Think of it as an organized, supervised crowdfunding. The company says how much it needs, on what terms and for what purpose. Investors decide whether to take part. In Brazil, this market is regulated by the CVM (the Brazilian Securities and Exchange Commission), with self-regulation by ANBIMA and infrastructure provided by B3.
Equity: selling a piece of the company
Equity is the owners’ capital. When a company raises equity, it receives money in exchange for a stake in the business. Whoever comes in becomes a shareholder.
This can happen in several ways. The best known is listing on the stock exchange (the IPO), when the shares start trading publicly. But most equity transactions in Brazil take place outside the exchange: the entry of a private equity fund, a strategic investor or a new partner in a privately held company.
The great advantage is that there are no installments to pay. The money comes in and stays. If the business goes badly, the partner loses too. That is why equity is the natural path for higher-risk projects or those with longer-term returns.
The price is different: the owner shares the results and often part of the decisions. The new partner will be entitled to dividends, to vote and, as a rule, to a shareholders’ agreement with rules on management and exit. In short, equity is the most patient money — and also the most expensive, because whoever provides it becomes the owner of part of the company’s future.
Debt: borrowing without sharing control
Debt is third-party capital. The company receives the money and undertakes to repay it within an agreed term, with interest. The lender is a creditor, not a partner.
The main advantage is preserving ownership. The owner keeps 100% of the business and all the profit left after paying the debt. Interest is also usually deductible as an expense, which reduces the tax bill.
The trade-off is the obligation. Each installment falls due no matter what, and lenders normally require collateral and commitments — the so-called covenants, such as keeping leverage below a certain limit. Debt works well for companies with predictable cash generation. In excess, it squeezes cash precisely in the hardest moments.
DCM: debt taken to the market
DCM stands for Debt Capital Markets. Instead of taking out a bank loan, the company issues debt securities and sells them to investors. Each investor lends a portion; together, they finance the full amount.
For the business owner, this opens doors that bank credit does not always offer: longer maturities, larger volumes, tailor-made repayment structures and often a lower cost, because investors compete with one another.
The most widely used instruments in Brazil are:
- Debentures: the most traditional corporate debt security. Some types, such as incentivized infrastructure debentures, are tax-exempt for individual investors.
- Commercial notes (notas comerciais): simpler and faster instruments, widely used by mid-sized companies and in smaller transactions.
- CRI and CRA: receivables certificates linked, respectively, to the real estate sector and to agribusiness.
- FIDC: funds that buy a company’s receivables — trade bills, contracts, invoices — and advance the cash.
An issuance involves preparing the company, setting collateral and terms, hiring someone to structure and distribute the securities and presenting the business to investors. It is no longer just for large corporations: well-organized mid-sized companies already access this market regularly.
DCM vs. bank lending: what is the difference
Both are debt, but the difference lies in who lends and how. In bank credit, one bank lends its own money and keeps the risk on its balance sheet. In DCM, the company sells securities to several investors — and the bank, when it takes part, usually acts as arranger of the issuance, not as lender.
A bank loan is quick and simple. All it takes is the relationship with the account manager, a credit analysis and signing the contract. On the other hand, maturities tend to be short, the volume is capped by the exposure that bank is willing to have to the company, and the collateral required is usually heavy.
DCM requires more preparation, but gives more back. The company needs audited financial statements, issuance documentation and, in some cases, a credit rating. There are costs for structuring, legal advice and registration. In return, it obtains longer maturities, larger volumes, diversified creditors and terms negotiated according to its cash flow.
There is also a difference when it comes to renegotiating. With a bank, the conversation is between two parties. In DCM, changing the terms requires approval by investors at a bondholders’ meeting — which is why the structure needs to be well designed from the start.
| Bank lending | DCM | |
|---|---|---|
| Who lends | One bank, with its own funds | Several investors, who buy the securities |
| Role of the bank | Lender | Arranger and distributor (when involved) |
| Typical maturity | Shorter | Longer |
| Volume | Limited to one bank’s appetite | Larger, adding up several investors |
| Speed | High | Requires weeks or months of preparation |
| Requirements | Credit analysis and collateral | Audited statements, documentation, sometimes a rating |
| Renegotiation | Bilateral, directly with the bank | Through a bondholders’ meeting |
Equity and debt, side by side
| Equity (owners’ capital) | Debt | |
|---|---|---|
| Whoever provides the money becomes | A shareholder | A creditor |
| Must it be repaid? | No | Yes, with interest and a term |
| Control of the company | Shared with the new partner | Stays with the owner |
| Share of profits | Shared | All stays with the owner, after interest |
| Risk for the company | Less pressure on cash | Fixed installments, even in a bad year |
| Cost | More expensive in the long run | Cheaper, if cash flow can support it |
| Best suited to | High-risk or long-return projects | Businesses with predictable cash flow |
How to choose
There is no right answer for everyone. The choice depends on how much cash the company generates, how much risk the project carries and how much control the owner is willing to share.
In practice, the best-structured companies combine both paths. They use debt to finance what is predictable and bring in partners when the leap is too big to fit into installments. The most common mistake is choosing the familiar path rather than the most suitable one — accepting a partner when a debenture would do, or taking on debt when the project called for patient capital.
Before deciding, it is worth asking three questions: what is the business worth today, how much can it safely pay, and what does the owner want to preserve. Answering them well is the first step in any fundraising — whether by selling a piece of the company or by borrowing.
Magma advises mid-sized and large companies on M&A, the entry of new partners and the structuring of fundraising. If your company is facing this choice, talk to us.