Debt vs. Equity Financing Essay Example

Financing is something that is very important in the accounting world. Some companies would not be able to operate without financing. There are many types of financing. This short paper will focus on two types of financing that every company or organization should be aware of. Those types of financing are debt financing and equity financing. This paper will give the definition of both types of financing and also two examples of each. The paper will also discuss which of the financing is more important and which will be a better choice for the company that will be using them. The people that are not in the accounting world may want to know what debt financing is and how it works. Well, debt financing is a type of financing that is used by many different businesses. The most important fact that should be considered about debt financing is the amount of interest rate that must be paid when the money is being borrowed. This is something that most companies do not look into. Debt financing is split up into two different categories. They are long term debt financing and short term debt financing. Long term debt financing include items such as equipment, land, buildings, and machinery.
According to Ward, (2008), with long term debt financing, the scheduled repayment of the loan and the estimated useful life of the assets extends over more than one year. Short term debt financing is money that is needed for businesses on a day-to-day basis. This would include inventory, supplies, and paying the employees that is owe to them. They are called short term debt because the money that was borrowed will be expected to be paid back in less than one year. Some examples of this type of financing would be income Bonds, Bank Loan, Zero coupon bonds, and convertible bonds.
The next type of financing that this paper will discuss is equity financing. Equity financing is the amount of money that owner or investors who take the ownership of the organization. Ward, (2008), stated that