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Debt vs. equity financing
As its name implies, debt financing involves borrowing money from a bank, individual, or company, with a promise to pay back the principle with interest. Any organization can make use of debt financing, spanning from a small single proprietorship to a large multinational. The owner of the business retains control over the organization and the only responsibility he or she has to the lender is to make the agreed-upon payments on time (McCormick 2012). These payments are also tax-deductible for the business, one of the attractions of debt financing (McCormick 2012). For this reason, it might be financially advantageous to use this form of financing, if interest rates are low enough. However, there are some drawbacks, namely the fact that when interest rates are high in relation to the business tax rate, the cost of borrowing may be prohibitive. Regardless of how well the business may do, the loan must be paid back to the creditors in a timely fashion. A failure to repay will impact the business' credit rating -- or in the case of a sole or joint proprietorship, in which the owner's assets are not separate from those of the...
"If you're investing in fixed costs, such as a new piece of equipment, then you likely won't see any cash returns from it in the near-term. If you need the money to invest in variable costs such as materials for the product you make or costs associated with each new client, than the debt investment should have associated cash inflow" (McCormick 2013). Debt financing is most suitable for companies that are already established; have sustained sources of income; and ideally the debt should be used to finance new equipment rather than to support the day-to-day maintenance expenses of the business. Businesses with steady sources of cash from customers, versus businesses with volatile or seasonal demand are also more suitable candidates for debt financing.
Equity financing involves selling shares or having an 'angel' investor or venture capitalist finance the company. Because equity financing is an investment, not a loan, there is no obligation to pay back the lender. The…
References
Debt v. equity financing. (2012). National Federation of Independent Businesses (NFIB).
Retrieved at http://www.nfib.com/business-resources/business-resources-item?cmsid=50036
McCormick, Amanda. (2012). Debt equity. Entrepreneur.com. Retrieved at:
http://entrepreneurs.about.com/od/financing/a/debtfinancing.htm
.....debt and equity has a number of different implications, including some significant tax implications. Debt is repaid from earnings prior to taxation, where equity payouts typically occur on an after-tax basis. This is because debt repayments take priority over the payment of dividends or even to stock buybacks or retained earnings. Debt capital is thus repaid before the company is taxed -- debt lowers taxable income. Thus, debt will also
AMSC had announced a letter of intent for secured debt financing in July of 2003 (AMSC 2003 Annual Report) when the stock was trading in the range of $8 per share. The blackout gave the firm's stock considerable momentum, and it finished the month of August up over 50% at $12.19 per share (MSN Moneycentral, 2010). Equity issues normally result in dilution of the stock price, since the issue
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All of these benefits would not have been possible however without the outsourcing strategies being firmly grounded in a financial analysis of their value and ROI over the long-term (Lacity, Khan, Yan, Willcocks, 2010). The incremental revenue growth and continued expansion of any business is predicated on how effectively they can transition from one set of challenges to the next, seeking a means to create greater value by addressing
Business Financing and the Capital Structure Generally, businesses need to make several financial decisions that have significant direct effects on their operations and success in the increasingly competitive marketplace. However, there are numerous varying options that are available to businesses regardless of the types and sizes. The concept of business financing has emerged as an important aspect in the modern business environment because of the various financial decisions to be made