Debt financing allows you to pay for new buildings, equipment and other assets used to grow your business before you earn the necessary funds. This can be a great way to pursue an aggressive growth strategy, especially if you have access to low interest rates. Closely related is the advantage of paying off your debt in installments over a period of time. Relative to equity financing, you also benefit by not relinquishing any ownership or control of the business. Debt Disadvantages
The most obvious disadvantage of debt financing is that you have to repay the loan, plus interest. Failure to do so exposes your property and assets to repossession by the bank. Debt financing is also borrowing against future earnings. This means that instead of using all future profits to grow the business or to pay owners, you have to allocate a portion to debt payments. Overuse of debt can severely limit future cash flow and stifle growth.
| Debt Financing | Equity Financing|
Definition| Debt financing refers to any borrowed money which theentrepreneur must pay back to the lending institution. It can come in the form of a loan, line of credit, bond, or even an IOU. An interest rate and other terms apply.| Equity financing is money lent in exchange for ownership in a company.New businesses can use equity financing for their startups or when they need to raise additional equity capital to offset existing debt.| Who depends on this type of capital?| • Companies which are well- established and have demonstrated steady sales, solid collateral, and profitable growth often rely on debt capital for financing their businesses.| • Companies with a more conventional approach to management, high profitability, and/or poor credit ratings often rely on equity capital for their funding needs. • Ideal form of capital for small business startups and newly launched companies since they have not established a solid track record of success and face uncertainty in...