| DEBT.
VS. EQUITY
Debt
financing means borrowing money that is to be repaid
over a period of time, usually with interest. Debt financing can
be either short-term (full repayment due in less than one year)
or long-term (repayment due over more than one year). In simple
words, this means borrowing funds from lenders, banks,
organizations etc.
Equity
financing describes an exchange of money for a share
of business ownership. This form of financing allows you to
obtain funds without incurring debt; in other words, without
having to repay a specific amount of money at any particular
time. In simple words, this means, selling shares or stock of
your company and inviting other people to contribute capital
giving them a share of profits in return.
Debt and equity financing
provide different opportunities for raising funds, and a
commercially acceptable ratio between debt and equity financing
should be maintained.
Excessive debt financing may
impair your credit rating and your ability to raise more money
in the future. If you have too much debt, your business may be
considered overextended and risky and an unsafe investment. In
addition, you may be unable to weather unanticipated business
downturns, credit shortages, or an interest rate increase if
your loan's interest rate floats.
Conversely, too much equity financing can indicate that you are
not making the most productive use of your capital; the capital
is not being used advantageously as leverage for obtaining cash.
Too little equity may suggest the owners are not committed to
their own business.
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- Equity Financing |
