Debt and Equity Financing
Debt is the borrowing of money to fund your business from a financial institution, banks, or other financial companies. Yet, equity includes bringing in partners to supply funds in exchange for a share of the firm's ownership. Also, debt is more dependable than equity. These are because it gives you complete control over your business, as opposed to equity, which requires you to share decisions on how to manage it (Harley, 2017).
Benefits of Debt Financing
Taking on debts from banks and other financial institutions improves your business credit, which is beneficial for future insurance rates and loan borrowing. These can enable the business to obtain larger credit in the future at better interest rates. Debts are more beneficial as the interest paid on the loans softens the misfortune of payments as they are tax deductible.
Advantages of Debt over Equity
However, you enjoy getting competitive interest rates if the business has the assets to back the loan and good credit score. Debts lessen the dilution of the existing investors and the company’s founders since each time equity is issued, the current investor continues to become small. Unlike equity where you have to share the profit gained by the business, in debt the owner enjoys all the profit. Furthermore, when the owner takes a debt, he or she enjoys all the rights unlike in equity where the investors own a larger portion of the business where he or she gets entitled to the voting rights (Harley, 2017). The investors may decide to elect new executives thus losing the control of the firm entirely. In addition, it more reliable to have debt financing than equity financing as the owner of the company you will enjoy more benefits in debt financing.
References
Harley, K. (2017). Debt vs Equity Financing: What's the Difference? | MintLife Blog. MintLife Blog. Retrieved 27 July 2017, from https://blog.mint.com/consumer-iq/the-difference-between-debt-and-equity-financing-for-your-small-business-0613/
