Debt financing versus equity financing, which financing has more advantages over the other financing. Debt vs. equity financing is the most vital decision a manager will face when determining the needed capital to fund his or her business operations. Both types of financing are the main sources of capital that is available to a business. Both types of financing have advantages and disadvantages when a manager or owner is trying to raise capital.
Debt financing can either be long-term or short-term and either secured or unsecured. Debt financing is obtained from a bank and will take the form of loans that must be repaid over-time along with an added fee known as interest. This loan will allow a borrower to finance daily operations. Debt financing offers a business an advantage from paying the interest rate on the loan. The advantage is the interest can be used as a deductible at the end of the year. Debt financing has a disadvantage, if a business has irregular cash flow they will have difficulty in making regular payments on their loan. When a business obtains a secure loan, the bank will hold a title for portion of the investment in exchange for cash. The portion the bank holds onto can be used for collateral in the case the loan is not paid by the maturity date.
Equity financing is in the form of money obtained through investors in exchange for shares of ownership in the business. These funds may come from family members, friends, or wealthy investors. A major advantage to equity financing, keeps a business from being obligated in repaying any money. Investors hope to regain their money invested through future profits. Equity financing will also help to increase the credibility of a business through any high-profile investors they may have secured. When an individual invests money in a company, one disadvantage to this is that they become part-owners of the business that allows them to have a say