Base of

Debt  Equity 
Difference

Funds borrowed from

Funds raised by the company by
financiers without
Meaning giving the investor’s ownership
giving them ownership
rights;
rights;

Debt finance is a loan Equity finance is an asset of the

What is it for
or a liability of the company, or the companies
the company?
company. own funds.

Debt finance is an
What does it Equity finance gives the investor
obligation to the
reflect? ownership rights.
company.

Debt finance is Equity, on the other hand, is

Duration comparatively short long term finance for the
term finance. company.

Status of the Debt financier is a The shareholder of the company

lender lender to the company. is the owner of the company.

Debt falls under low- Equity falls under  high risk

Risk
risk investments. investment.

Debt financing can be

Types of categorized by Term Shares and Stocks can
financing Loan, Debentures, categorize equity.
Bonds, etc.

Investment Lenders get paid to Shareholders of the company

Payoff interest over and get a dividend on the ratio of
 above the principal shares held / profit earned by
amount financed. the company.

Dividend paid to the

The interest payable to
shareholders is variable,
Nature of the the lenders is fixed and
irregular as it completely
return regular and also
depends on the profit earnings
mandatory.
of the company.

Security is required to
secure your money. No security is required in case
However, several of investing in a company as a
Security
companies raise funds shareholder as the shareholder
even without giving gets ownership rights.
security.

Advantages & Disadvantages

#1 – Debt Financing
Advantages

 Debt financing does not give the lender ownership rights in your
company. Your bank or your lending institution will not have a
right to telling you how to run your company, and hence that
right will be all yours.
 Once you pay back the money, your business relationship with
the lender ends.
 The interest you pay on loans is after the deduction of taxes.
  You can choose the duration of your loan. It can either be long
term or short term.
 If you choose a fixed-rate plan you the amount of the principal
and the interest will be known, and hence you can plan your
business budget accordingly.

Disadvantages

 You have to pay back the money in a specific amount of time

 Too much of a loan or debt creates cash flow problems which
create trouble in paying back your debts.
 Showing too much of debt creates a problem in raising equity
capital as debt is considered high-risk potential by investors, and
this will limit your ability to raise capital.
 Your business can fall into big crises in case of too much debt,
especially during hard times when the sales of your organization
fall.
 The cost of repaying the loans is high, and hence this can reduce
the chances of growth for your company.
 Usually, the assets of a company are held collateral to the
lending institution to get a loan as security of repaying the loan.

#2 – Equity Financing
Advantage

 The risk here is less because it is not a loan, and it need not be
paid back. Equity financing is a very good way of financing your
business if you cannot afford a loan.
 You actually collect a network of investors, which increases the
credibility of your business.
  An investor does not expect immediate returns from his
investment, and hence it takes a long term view of your business.
 You will have to distribute profits and not pay off your loan
payments.
 Equity financing gives you more cash in hand for expanding your
business.
 In case the business fails, the money need not be repaid.

Disadvantages

 You can end up paying more returns than you might pay for a
bank loan.
 You may or may not like giving up the control of your company
in terms of ownership or share of profit percentage with
investors.
 It is important to take the consent or consult your investors
before making a big or a routine decision, and you may not
agree with the decision given.
 In the case of a huge disagreement with the investors, you might
have to only take your cash benefits and let the investors run
your business without you.
 Finding the right investors for your business takes time and
effort.
 SALES
less Cost oF goods sold
COGS & SG&A
EBITDA Earning before interest tax
depreciation & amortization
Less Depreciation &
amortization D&A
EBIT Earning before interest tax
Less Interest (Debt)
EBT/PBT
Less TAX Corporate tax
PAT Profit after tax
Less Provisions &
reserves
Less Dividends (Equity)
Retained Earning