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Debt Financing
Debt financing involves borrowing money, typically in the form of a loan from a bank or other financial institution or from commercial finance companies, to fund your business.
Getting a business loan generally requires good credit and solid financials, as well as collateral for larger loans.
Many small business owners are afraid to take on debt because they fear they may not have the cash flow to repay the debt (plus interest) in a timely fashion.
Others may be concerned that they don't have the credit-worthiness to get a bank loan, and so don't want to even bother applying.
But debt financing has some definite advantages that make it an option worth considering for any small business owner.
First and foremost, unlike with equity financing, debt financing allows you to retain control of your business, as ownership stays fully in your hands.
You may have to back up a loan with collateral, so if you default you may lose certain tangible assets, but you won't lose creative and strategic control of your business.
In addition, taking on debt can build your business credit, which is good for future borrowing and for insurance rates.
It's also worth bearing in mind that interest paid on loans is tax deductible, softening the blow of repayment somewhat.
Equity Financing
Equity financing involves bringing in investors or partners who provide capital in exchange for a share of ownership of the business.
These investors or partners generally invest because they expect to make a profit when the business becomes successful.
Unlike a loan, if you don't make a profit, you usually aren't required to pay them back. The absence of monthly loan payments can free up significant working capital for the business.
Many small business owners also are drawn to equity financing because, while investors or partners will only provide equity if they have faith in the earning power of your business, you don't necessarily need the pristine financial history that is required for a loan.
This can be a crucial point for many small business owners, especially for those just starting a business without the two or three years of financials most banks look at.
The cost of these benefits is that you no longer retain sole control of your business.
This means that not only will your investors be entitled to a share of profits, but they also have a say in the running of your business and the direction it's headed.
This may not seem like a problem at the beginning when you need cash, but can sometimes lead to conflict further down the road.
On the other hand, a strong, smart partner may be an asset to your business; especially if you find someone who is a good compliment to yourself.
If you're the creative, visionary type, you may benefit from the balancing influence of a partner who is grounded and pennywise.
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Compare and contrast debt finance and equity finance?
similarities between equity n debt finance
What are the type of project finance?
its through debt or equity
Difference between retrun on equity and return on capital employed?
return on capital employed (ROCE) is net income/(debt&equity) whereas return on equity is income/equity (without debt).
What is financing mix?
it is the mix of debt and equity financing for an organization. it means the ratio of debt and equity in the finance of an organization. it may be debt free and full equity financing and vice versa.
What are 3 types of finance?
payable. recievable, cancellation
What us the differences between debt and equity capital?
Equity capital is the form of finance which is provided by owners of the business while debt financing is form of long term loan which requires to pay interest. Debt financing has the benefit that interest paid for that is tax deductable while equity capital don't have to pay any interest and that's why it is not a tax deductable so for this type of benefit of debt finance companies tries to maintain proper mix of debt as well as equity capital in the business.
What is debit to equity ratio?
Debt to equity ratio is a measurement criteria to measure how much debt is used in business as compare to owner's capital to finance the business.
What is the difference between refinance and home equity loans?
Both refinancing and home equity loans release finance from the equity a person holds in their property. The difference that a loan is taken out based on the amount of debt owed on the property against the value if it was sold, but is separate form your mortgage. Refinancing will replace your current mortgage with a new one. Equity Loans generally carry a higher rate of interest that a mortgage.
How can you decrease owners equity?
Owners equity can be decreased by obtaining finance from debt instead of issuing shares. Zeshan Shahzad 03234449714
What is the difference between finance expense and administrative expense?
Finance expense is that amount paid for the acquisition and using debt or equity finance like interest, brokerage fee, etc Administrative expense is that amount which is used to run day to day activities of business like admin staff salaries rent insurance etc
As debt is a cheaper source of finance than equity companies should be highly geared in order to maximise their market value?
debt
Why is accounting differenciating between assets and equity?
Equity is the proportion of those assets you own, compared to the debt on those assets. An example would be a house. A house is an asset. The equity is the amount of the mortgage that is paid off plus any appreciation the value of the house. Same with a company. Its the difference between what you own and the debt or liabilities. Assets minus liabilities equals equity. You have equity in assets.
