Debt vs Equity Financing

When a person starts anew business, he needs funds to carry it on in a sooth manner. There are two basic methods that are available for business funding or financing. One is equity and other is debt financing. The debate over debt vs equity financing is an ongoing g process. Both the methods are equally good. Both of them have their own pros and cons. Here is an explanation of both these types so that you can make a smart choice.

Debt financing refers to a state where money is borrowed and has to be paid back gradually in years. These payments come tagged with an interest rate. You can opt for short or long term funding which differ in the period over which the payment has to be made. In this type of funding, you are just supposed to pay back the borrowed amount to the lender which can be a bank or some private institutions or the traditional lenders. Equity financing differs in a way that for the money you take from the lenders, you give them a share of your business. This deducts the need of debt on the company. The lenders will be a type of investors in your business. Small and big businesses both can use this method to raise funds and get a good return on investment.

The advantages that come along the debt funding system are that you have full control over the business and you can use the further profits of the company for paying returns to owners of the company. You pay interest with the amount of loan and this gives you an additional benefit in the taxation. Debt financing cannot be called as a secure method but it ensures that at least your business will remain solely your entity. You need not worry about giving others a share from the profit.

Equity funding however has its own advantages that make it a widely acceptable method as well. If a company has no funds, it does not have to pay anything to the investors. However in the case of equity funding, your assets will be taken away if you fail to make payments. A business which has appropriate amount of equity appears to be better to the investors. If the company enjoys good equity, it would get more investment in the future as well. The cash available with the company will be more as no interest payments have to be made. Debt vs equity financing is a tough discussion but when you have the advantages and disadvantages of both the methods in front of you, decide upon which method to choose.