debt financing vs equity financing
Debt Financing Vs. Equity Financing
The following article on debt financing vs. equity financing will help you ascertain which is better of the two options to fund your projects.
Key Points | Debt financing | Equity financing |
Process | Procedure of raising money is easier, Certain rules and regulations are not applicable. | Raising money is comparatively difficult, as there are a number of security laws and regulations, which have to be complied by the business. |
Ownership Rights | The business owner has full control and ownership of the business. | The investor or the venture capitalist has ownership rights, as well as decision-making power, in running the business. |
Rights over Profit | The lenders only have a right over the principal loan and the interest incurred on it. They have no rights over the profits or revenues generated by the business. Once the loan is repaid, the relationship between the lender and the business owner also ends. | The rules function differently in this case. |
Ease of doing Business | The decisions and rights regarding running the business, solely lie with the owner, so, it is easier to do business. | The shareholders and investors have to be updated and consulted about the business regularly. So, it is a bit complicated to do business. |
Repayment | The business debt has to be paid back within a given period of time. If for some reason, the business does not make enough profits or is going through a loss, there is a lot of pressure on the business owner to repay, as an increased time period of repayment means an increased interest on the loan. | The pressure to repay is comparatively lesser. The revenue which the business makes is used to repay the lenders. |
Cost to Company | The loan amount is already known and fixed, so the business owner can make a provision for it beforehand. Also, the interest incurred on loan can be deducted from the corporate tax . Thus, cost to company is easy to forecast, plan, and reimburse. | Here, if the business generates huge profits, the investor and the venture capitalist have to be paid back money, which is much in excess of the amount they invested. |
Future Funding | If the business has taken too much loan, that is, its debt to equity ratio is on a higher side, the investors will not like to invest in such a business as it's a "high risk" venture. | If the investors are backing the business, there will be no problem in arranging finance for the business in future, as investors lend credibility to a business and lenders will have no reservations in giving loans to such businesses. Thus, this method improves the scope of arranging finance for the business in future. |