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QUESTION
Debt vs Equity Financing
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Religion |
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APA |
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Answer
Two business financing options are available for modern businesses: equity financing and debt financing. Financing decisions are often mediated by considerations regarding accessibility of the funds and the extent to which the owners are willing to relinquish control of the business. Equity financing is preferred by firms that are willing to sell part of their equity in return for capital. For example, a company may finance its growth by offering 15% ownership to an investor. The end game is a15% ownership for the latter and a right to participate in all business decisions henceforth. The principal advantage of equity capital is that the recipient is neither duty-bound to repay the debt nor does it attract periodic payments or interest as applicable to debt financing. Instead, it offers the company necessary to expand the business with the inevitable loss of control the only downside.
On the other hand, debt financing, most commonly advanced in the form of a loan typically come with repayment obligations within set timelines. In most cases, creditors may impose restrictions barring recipients from pursuing ventures outside their core business. Since debt could raise the company’s debt-to-asset ratio, it could hamper possibilities of future financing. Nevertheless, there are several benefits from debt financing option. For instance, irrespective of the magnitude of debt, this arrangement does not cede control of the company to the lender. Moreover, the contract lapses as soon as the repayment is complete. Additionally, loan interests are tax deductible, and do not vacillate, in principle.
My analysis of the foregoing financing options would lead me to debt financing. This is because it will avail to me funds for expansion without the ignominy of cessation of control. Fixed repayment schedules could also help with repayment plans.
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