Debt Versus Equity Financing Paper
Debt Versus Financing Paper
A company has a couple of basic ways to finance the business; debt financing and equity financing. This paper will define debt and equity financing and provide examples of both. Of both of these it will be identified as to which way has more advantages and why.
Debt financing can be defined as obtaining capitol through borrowing money that has to be repaid over a length of time with interest. Examples of this type of financing are selling bonds, bills or notes to individuals or investors. In return for the lending the money individuals or investors become the creditors and have an agreement that the principal and interest will be paid back. Some other examples of debt financing are Small Business Administration loans, line of credit, and real estate mortgages.
Equity financing is defined by obtaining capitol through selling common stock or preferred stock to individuals or investors. In return for the money paid shareholders get ownership interests in the corporation. An example of equity financing is selling shares of stock in the company.
Some advantages to equity financing are; you can use your cash and that of your investors when you start up your business for all the start-up costs, instead of getting a loan having to make loan payments right out the start of the business. Also if the business fails there is no repayment of the investor’s contribution. Another advantage is that the owner may be able to get additional help with the business through the knowledge, wisdom, and resources from the investors. Some disadvantages to equity financing are; using investor’s money will mean they will actually own a piece of your business. Investors will have some control of the business depending on how money they invest. As an owner this is something to be aware of and think about how much control you are actually...
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