Debt Vs Equity Financing

Debt Versus Equity Financing

In financing a business start-up there are two types of financing, equity and debt. Both offer advantages that the other does not but each also has disadvantages. Each business must choose the method of financing their business that suits its needs.

Equity financing raises capital financing through business ownership interests by investors. The advantage of equity financing is the business does not incur liabilities that must be repaid. The disadvantage of equity financing are partners or shareholders who may influence how the business is run and share the profits.

Examples of equity financing are the issuance of stock in the business and private investors such as individual partners (angels) or venture capitalists. The issuance of business stock is typically not performed for a business start-up, but after the business has matured and has reached a point where it needs to expand. For a business start-up that requires capital is partnership with either an individual or group that have the funds to invest and believe the business will succeed based on the product. Individual partners are also known as angel investors and group partners are known as venture capitalists. An example of venture capitalists would the television show ‘Shark Tank’.

Debt financing raises capital financing through the issuance of bonds, notes, or credit cards. The advantage of debt financing is the lack of partners or shareholders in the business and loan interest is tax deductible. The disadvantage is current and long-term liabilities that must be repaid and the level of leverage it creates.

Examples of debt financing are the issuance of bonds, notes, and credit cards. As with equity financing, the issuance of bonds is typically performed after the business has matured and requires capital to expand. For a business start-up the common means of debt financing is bank loans. The problem with debt