Importance of debt financing and equity financing

Source: https://www.investopedia.com/ask/answers/042215/what-are-benefits-company-using-
equity-financing-vs-debt-financing.asp

What is the importance of debt financing?

One advantage of debt financing is that it allows a business to leverage a small
amount of money into a much larger sum, enabling more rapid growth than might
otherwise be possible. Another advantage is that the payments on the debt are
generally tax-deductible.
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What is the importance of debt financing?

One advantage of debt financing is that it allows a business to leverage a small
amount of money into a much larger sum, enabling more rapid growth than might
otherwise be possible. Another advantage is that the payments on the debt are
generally tax-deductible.

Advantages vs. Disadvantages of Equity

Financing
Source: https://www.thehartford.com/business-insurance/strategy/business-financing/equity-financing

Advantages

 Less burden. With equity financing, there is no loan to repay. The business

doesn’t have to make a monthly loan payment which can be particularly
important if the business doesn’t initially generate a profit. This in turn, gives you
the freedom to channel more money into your growing business.
 Credit issues gone. If you lack creditworthiness – through a poor credit history or
lack of a financial track record – equity can be preferable or more suitable than
debt financing.
 Learn and gain from partners. With equity financing, you might form informal
partnerships with more knowledgeable or experienced individuals. Some might
be well-connected, allowing your business to potentially benefit from their
knowledge and their business network.

Disadvantages

 Share profit. Your investors will expect – and deserve – a piece of your profits.
However, it could be a worthwhile trade-off if you are benefiting from the value
they bring as financial backers and/or their business acumen and experience.
  Loss of control. The price to pay for equity financing and all of its potential
advantages is that you need to share control of the company.
 Potential conflict. Sharing ownership and having to work with others could lead
to some tension and even conflict if there are differences in vision, management
style and ways of running the business. It can be an issue to consider carefully.

Deciding Factor

 If your creditworthiness is an issue, this could be a better option.

 If you’re more of an independent solo operator, you might be better off with a
loan and not have to share decision-making and control.
 Would you rather share ownership/equity than have to repay a bank loan?
 Are you comfortable sharing decision making with equity partners?
 If you are confident that the business could generate a healthy profit, you might
opt for a loan, rather than have to share profits.

Advantages vs. Disadvantages of Debt

Financing
Advantages

 Retain control. When you agree to debt financing from a lending institution, the
lender has no say in how you manage your company. You make all the decisions.
The business relationship ends once you have repaid the loan in full.
 Tax advantage. The amount you pay in interest is tax deductible, effectively
reducing your net obligation.
 Easier planning. You know well in advance exactly how much principal and
interest you will pay back each month. This makes it easier to budget and make
financial plans.

Disadvantages
Debt financing has its limitations and drawbacks.
 

 Qualification requirements. You need a good enough credit rating to receive

financing.
 Discipline. You’ll need to have the financial discipline to make repayments on
time. Exercise restraint and use good financial judgment when you use debt. A
business that is overly dependent on debt could be seen as ‘high risk’ by potential
investors, and that could limit access to equity financing at some point.
 Collateral. By agreeing to provide collateral to the lender, you could put some
business assets at potential risk. You might also be asked to personally guarantee
the loan, potentially putting your own assets at risk.
Deciding Factor

 How important is it for you to retain full control of the business?

 How important is it to know precisely what you’ll owe in monthly payments?
 Are you comfortable with making regular monthly payments?
 Are you able to qualify for debt financing? How is your credit history? Do you
have a good credit rating?
 Do you have collateral you can use? Are you comfortable with using it?