Running head: DEBT AND EQUITY FINANCING

Debt and Equity Financing

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DEBT AND EQUITY FINANCING

Debt and Equity Financing

When companies need capital, debt and equity financing are the main types of financing. The

decision depends on the company's sources of funding available at any time. However, these two

financing methods are different from each other. If the company chooses equity financing, it

initially has no obligation to repay, so it has additional working capital for business growth.

However, it involves selling part of the company in exchange for capital. This means losing

some control of the company. In the case of investors taking over the company, the company is

obliged to distribute dividends to equity providers. This is a risky investment. Once it goes

bankrupt, investors may not get any return on investment.

On the other hand, in the case of external financing, the loan is taken out and repaid to the lender

with interest. The company is still in control, so the relationship between the debtor and the

company ends after the debt is cleared. Therefore, the company must pay the entire loan amount

plus interest. Even if the company goes bankrupt, they are obliged to pay the financier. This type

of financing is not considered risky because the law requires the company to pay the financier.

The best way to fund startups is through debt financing. Investors have no influence on the

company's business decisions, operations and operations, so entrepreneurship is free to run.

Provide external financing within a certain period, so there is a constant cash flow during this

period. For an expanding company, equity financing is the best financing method. This is

because increasing debt increases risk, which in turn increases overall expenses. If the

transaction fails, you have no debt to the investor. The type of company makes one company

more attractive than another. Most investors are keen to invest in manufacturing, while some

investors are reluctant to support start-ups.

DEBT AND EQUITY FINANCING

REFERENCE
DEBT AND EQUITY FINANCING

Maverick, J. V. (2020, July 20). Equity Financing vs. Debt Financing: What’s the difference?

Investopidiaa. https://www.investopedia.com/ask/answers/042215/what-are-benefits-

company-using-equity-financing-vs-debt-financing.asp