Should companies use debt or equity financing to raise capital for growth

Should companies use debt or equity financing to raise capital for growth

By Donald Williams Williams Accounting and Consulting

Building and growing a successful business is never easy. You may need an injection of outside capital to start or expand your operations. There are two main ways for companies to raise funds: debt financing and equity financing.

There are pros and cons to each option. Which one is best for a business depends on many different factors. Here is a short guide to financing.

What is Debt Financing?

A company can raise funds by going into debt, which is called debt financing, which involves raising capital by selling debt securities. In effect, the company takes out a loan. However, the structure of the loan can vary significantly depending on the specific circumstances. Debt financing could be the right option for your business if you are looking to raise funds.

Here are three potential benefits of debt financing:

  1. Retain Full Ownership: When financing through debt, you will not lose any part of your ownership interest in the business.
  2. Predictable repayment terms: Repayment terms are usually negotiated when a debt financing agreement is entered into. This makes the terms quite predictable – you’ll be able to know exactly what you’re getting into.
  3. Tax-deductible interest payments: Debt bears interest. Although this is a disadvantage, interest payments made by a business are generally tax deductible.

What is equity financing?

Equity financing is the primary alternative to debt financing and is a process of raising capital through the sale of shares. A business owner is currently selling part of his stake in the business for cash. This might be the right choice for your business.

Here are two potential benefits of equity financing:

  1. No Refunds: When raising funds through equity financing, you typically don’t have to repay anything.
  2. Your debt-to-equity ratio stays constant: Because equity financing doesn’t involve debt, a company’s debt-to-equity ratio stays the same, which means it can be easier to get financing in the future.

How to choose between debt financing and equity financing

Raising funds to start or grow a business is complicated. It is crucial that you understand the pros and cons of all available options. A business consultant can sit down with you, review your business’s particular financial situation, discuss your long-term goals, and help you carefully weigh the pros and cons of debt versus equity financing. With extensive experience helping entrepreneurs start and grow successful businesses, the business team at Williams Accounting & Consulting is ready to help you determine the best course of action.

Carol M. Barragan