Equity Financing or Debt Financing – Article

There are several ways to fund a business. Among these means, equity financing and debt financing are very popular. What is the difference between the two financing options? Although both equity and debt financing are used to finance companies or businesses, there are differences between the two options. Knowing the pros and cons of equity financing and debt financing is very important when deciding what is best for the business.

What is equity financing?

Equity financing is used to raise a company’s capital by selling the shares to investors who wish to be shareholders of the company. Stock values ​​can vary from a few thousand dollars to millions or billions of dollars. Buying shares has been popular among investors as it has secured ownership over other investment opportunities. Selling shares on the stock market is a simple way to improve a company’s capital. This allows the company to find a wider range of investors for the business. Reputable companies are more likely to acquire more investors to invest in.

What is Debt Financing?

Debt financing involves selling debt securities to investors to raise capital for a business. The investors become creditors of the company and receive interest in repayment according to the debt. When a company uses debt financing, it promises lenders to repay the acquired amount.

However, equity financing and debt financing have advantages and disadvantages. It is the responsibility of the business owner to determine what is best for their business and where it should go.

In equity financing, there is no need to repay the money raised through it. Instead, the company will pay out a portion of the profits to investors. Unlike debt repayment, it depends on the amount of revenue earned by the business over a predetermined period. It is obvious that the business must be successful and pay a good return to the shareholders, but still not stressful like monthly debt repayment.

One of the disadvantages of equity financing is that the company must obtain the approval of the board of directors or the shareholders when making decisions and managing the company. This limits freedom of decision.

Debt financing has many advantages. The owner has full control of the business through the lenders who lent him money. The agreement between the company and the lender is complete once you have repaid the debt amount. In some states, there are many tax deductions when paying off a debt. Such benefits are only available through debt financing.

Even though there are benefits, it is necessary to pay off the debt, regardless of whether your business is successful or not. Imagine that a company that has chosen debt financing is going through a more difficult period. However, he must repay the regular payment of the debt at all costs. This can take the business from bad to worse. If the company does not do this, then it will haunt the guarantors or the family heritage.

Expanding a business will be difficult when deciding between the options available for a business. It is necessary to consider the pros and cons before deciding which is best for your business.

Carol M. Barragan