Debt Versus Equity

Debt Financing

Debt financing is a finance method in which a company acquires a loan and promises to repay Secured loans are an example of debt financing, these types of loans usually require some type of collateral. Unsecured loans are typically short term and usually are repaid within six to eighteen months. There are also intermediate-term loans paid within a three year period and long term loans that that require payment from the cash flow of the business within a five year period (Entrepreneur.com, 2013).

Equity Financing

Equity financing is a financing method in which a company distributes shares of its stock and receives cash in return. Venture capital is an example of equity financing which is used to finance high risk and high returned businesses. Private venture capitalists are another type , these are technology related investors. Investment banking firms also fall under this category and they provide expansion capital by selling company’s stock to the public. (Entrepreneur.com, 2013).

Which Alternative Capital Structure is more Advantageous?

Debt financing provides better opportunities to small businesses since they allow owners to keep ownership as well as manage the company. Debt financing provides more adequate financial freedoms, is easier to manage as well as provides less expense in the long run.

Both equity and debt are important resources for any company. A company should do its research on what options work are more beneficial for them. It is vital for a company to demonstrate ability to pay debt since investors look at that very closely.