Running Head: FORMS OF BUSINESS 1

Forms of businesses and their advantages

Name

Institution
Forms of business 2
What is equity financing

The process of raising capital through sales of shares is called equity financing. When

companies raise money because they have short term goals and they need to pay bills, they may

need to require funds to invest during their growth by selling shares. When this happens, they sell

ownership in return for cash (Reeb, Mansi & Allee, 2001). Equity financing may come from

families and friends, or from investors such as Google or Facebook. Private financing can also be

categorized under equity financing.

What is debt financing

Debt financing occurs when the firm need to raise money through selling of debt

instruments. In return, the individuals become who buy the debt instruments become institutional or

individual investors. The process includes selling the fixed income products such as bills notes and

bonds. The amount of loan, also called principal, must be paid back at an agreed time in the future,

when a company dissolves, the investors holding the debt instruments are paid first. When the

company pays debtors back, the cost of debt instrument is called interest also known as coupon

payments. The interests rates that are paid to the debts presents the cost of borrowing.

Difference between equity and debt financing

When there is need to raise capital, the company may use the two types of financing, the

equity option and the debt option. Most companies have used both options to raise capital. Equity

financing has no obligation to pay interest, while debt financing has an obligation to pay interest.

However, it provides an extra-capital that can be used in growing businesses (Fosberg, 2004). Debt

financing has an option of giving up the portion of business ownership as compared to equity

financing. The choice between equity and debt financing depends on which source is more suitable
Forms of business 3
or readily available for businesses and how much gaining control of the business means to the

business owners.

Benefits of equity and debt financing

Equity financing has no obligation to repay the money acquired through it. Although the

company owners try to make it lucrative and help in acquiring more capital in the future, there is no

guarantee for debt financing. Thus, equity financing is beneficial, as it places no additional burden

on the company. In this form, there is no requirements for monthly payments and it gives the

company more capital in growing businesses (Reeb, Mansi & Allee, 2001). Equity financing has a

disadvantage that the owners of the company have to sell part of the company to the public. They

will also have to share profits and consult with the new partners and there is no decision that may

affect the partners. The only way to eliminate the investors is through buying them out. This is

usually more expensive than the money they invested originally.

Debt financing includes borrowing money and paying back to the company with interest. the

most common form of debt financing is through use of loan (Fosberg, 2004). Debt financing means

use of loan. The first advantage is that debt financing means that the lender has no control over the

business and when the loan is paid back, there is no relationship with the lender (Reeb, Mansi &

Allee, 2001). The interest paid to these debts are not taxable, the business can also focus on

repayment since the loans are not deductible. Debt is an expense and has to be paid within a given

period, and the lender may require business to guarantee the business using personal finance or

loans.

References
Forms of business 4
Fosberg, R. H. (2004). Agency problems and debt financing: leadership structure effects.
Corporate Governance: The international journal of business in society.

Reeb, D. M., Mansi, S. A., & Allee, J. M. (2001). Firm internationalization and the cost of debt
financing: Evidence from non-provisional publicly traded debt. Journal of Financial and
Quantitative Analysis, 395-414.