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Corporate Debt vs.Equity Financing

John  Martinez's Profile

The nascent entrepreneurs who are planning to start a business are continuously looking for a way to raise fund to finance their business operation. You are required to have a business plan before you raise fund to finance your business.  
 
However, debt and equity financing are considered two different and crucial ways to finance your business. If you are not aware of the equity and debt financing, then you are required to acquire complete information on these two financial strategies. It can be beneficial for you to gather more information before employing them to raise fund for your business.   
 
What is equity financing?

 
In some situation, your relatives or friends may be interested to invest in your business. They may take initiative to review your business plan proposed by you. If they like the plan, then they can invest in your business. This can help you raise fund to start your business. However, there are various factors that you are required to consider before you take the plunge. When your family or friends are investing in your business, then this form of financing is considered to be equity financing. The corporate companies generally opt for this form of financing.    
 
You are required to know whether your family or friends are interested to invest or they are only offering loan. If your kith and kin are interested to invest, then it is considered as equity financing.  
 
What are the pros and cons of equity financing?
 
Here are a few benefits and drawbacks of equity financing:  
 
Advantages:
 
1. You can use the investor's fund to start your business and you are not required paying back the investors. Therefore, you don't have to carry the burden of debt as you not taking out loan to start your business.   
 
2. Unlike loan programs, you are not under obligation to pay back your investors if your business fails. Therefore, you don't incur debt if you business fails to make profit.  
 
3. If your investors have proper knowledge on business, then they can offer valuable advice to guide you. You can either consider angel investors or venture capital funding as you have different options while choosing your investors.   
 
Disadvantages:
 
1. A large portion of your profit may go into the pockets of your investors when you opt for equity financing. The investors usually expect a share of the profits because they are exposed to higher risks as they invest in business. When your business runs at a loss then you are not required to pay back the investors.  
 
2. Your investors own a large share of your business; therefore you are required to act in the interest of the investors.  
 
What is debt financing?
 
People who want to keep the business under their control usually opt for debt financing. In this situation, the business owner takes out loan from different financial institutions to raise fund for his/her business. You can take out personal loan in order to finance your business.  
 
What are the pros and cons of debt financing?

 
Here are a few benefits and drawbacks of debt financing:  
 
Advantages:
 
1. You can control you own business and third party does not interfere when you make a decision in relation to your business. You are not required to offer a large share to the investors when you make profit.  
 
2. You are required to pay interest on the loan as you take out loan; in this case the interest you repay on your loan is tax-deductible. You can manage to save considerable amount of business income from taxes, thereby it lowers your liability. You are not required to share profit with your lenders. Make sure you pay off the owed amount on time; otherwise you may incur debt.  
 
3. You can manage to get small business administration loan on favorable terms in order to start your business.   
 
Disadvantages:
 
There are various disadvantages of borrowing money to finance your business. But the prominent drawback of the debt financing is that you may incur debt if you default on your payment. It may further complicate your financial situation when your business undergo poor financial phase. Debt financing is not a feasible option for corporate organizations.  
 
Therefore, you are required to keep the benefits as well as drawbacks in mind when you are looking an option to finance your business.

Author Bio: John is a financial writer. He has written articles for many websites and blogs on several financial topics such as debt management, credit card consolidation, debt settlement, debt help, financial crisis, economy and many more. To know more, you may visit  https://twitter.com/debtcc
 

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