Debt Versus Equity Financing Paper Acc/400 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 Debt financing can be defined as obtaining capitol through borrowing money that has to be repaid over a length of time with interest.
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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 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. Advantages 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 et 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 willing to give up. Another disadvantage is deciding whether to make the company’s securities available to only a few investors or making it a complete open public trade.
Since the owner is expected to act in the investor’s best interest a decision will have to be made on how widely the owner wants to open up the business investments. Some advantages to debt financing are; not having to give up control of the business to investors. Obtaining a business or a personal loan, using personal money, credit cards or even getting support from friends and family to start up your business will allow the owner to have the money need to start up the business and not have to give up control of the business because money from investors was accepted and agreed.
Some other advantages are the interest repaid on the loan is tax deductible, you don’t have to share the profits with the lender, and applying for a loan through the Small Business Administration will get the company better terms that are costumed for small businesses. Some disadvantages to debt financing are; having to make payments during the start-up phase of the business. This can be risky, because sometimes in the start-up phase profits can be low and there is a chance that not enough profit was generated to make the payments.
Some other points to consider are; depending on the terms of the loan, personal assets may have been used and are at risk of being turned over to the bank if the company is unable to make payments as well as ensuring the company is not at a high risk for bankruptcy if the company uses too much debt financing. Conclusion Deciding which type of financing would best fit the business really depends on the situation at the time of start-up. There are several factors that weigh into this decision. Some factors are the owner’s financial position, the potential investor’s financial position, the owners credit standing, the usiness plan, if the owner has any tax issues and if the potential investors have any tax issues. Other law essays on this theme you will find Depending on all the factors stated above, the possibility of having a mixture of both types of financing may work better for the company versus streamlining it to just one type of financing. References Debt and Equity Financing – Advantages and Disadvantages Debt vs. Equity Financing: Which Is the Best Way for Your Business to Access Capital? | NFIB Debt vs. Equity — Advantages and Disadvantages – Small Business