Debt vs equity

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1. Debt vs equity By: eFinanceManagement.com

2. Contents Introduction Sources of Equity Sources of Debt Advantages of Debt compared to Equity Disadvantages of Debt Compared to Equity Comparison between Debt and Equity

3. Introduction Companies can raise capital via debt or equity. Equity refers to stocks, or an ownership stake, in a company. Buyers of a company's equity become shareholders in that company. The shareholders recoup their investment when the company's value increases (their shares rise in value), or when the company pays a  dividend . Buyers of a company's debt are lenders; they recoup their investment in the form of interest paid by the company on the debt . Debt market and equity market are broad terms for two categories of investment that are bought and sold . Debt instruments are essentially loans that yield payments of interest to their owners. Equities are inherently riskier than debt and have a greater potential for big gains or big losses.

4. Sources of equity 1. Retained Earning:- Firms can obtain equity financing by retaining earnings rather than by distributing the earnings to their owners. For permanently retaining the earnings the company may issue bonus shares to its shareholders. 2. Corporate Investors:- Many established companies purchase equity in younger, private companies. The investing companies are known as strategic partners, strategic investors, corporate investors, or corporate partners. Such investors create a network of companies . 3. Crowd funding:- People invest in the companies because they believe in their ideas and expect higher returns in future. Crowd funding involves a number of people investing in the company in small amounts. The money collected from the people is summed up to determine whether the targeted funds have been received or not.

5. Sources of debt 1.Insurance Agencies: Insurance agencies or companies are another major sources of debt financing to small business or startup companies. They normally offer 2 types of loans i.e. Policy Loan or Mortgage Loan. A policy loan depends on the measure of cash that is paid as a premium on the protection policy . 2.Purchasing on Installments: Buying goods on installments is one of another sources of debt financing. Buying on installments involves buying assets benefit as well as making installment in pre-decided installments. The purchaser needs to mortgage his assets until the point when full settlements of payments are made. 3.Finance Companies : Hundreds of alternative finance companies provide short-term cash loans to small businesses. However, these loans often carry high fees and interest rates. In addition, they are loosely regulated, and standards tend to be low. Small-business owners are advised to be extremely careful before signing a contract with one of these groups.

6. Advantages of debt compared to equity A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business.  Interest on the debt can be deducted on the company's tax return lowering the actual cost of the loan to the company. Raising debt capital is less complicated because the company is not required to comply with state and federal securities laws and regulations. Debt financing is widely available in one form or another for most small business owners. It is a popular avenue for many businesses because the terms are often clear and finite, and owners retain full control of their operations unlike an equity financing arrangement.

7. Disadvantages of debt compared to equity Interest is a fixed cost which raises the company's  break-even point . High interest costs during difficult financial periods can increase the risk of insolvency . The company is usually required to pledge assets of the company to the lender as collateral, and owners of the company are in some cases required to personally guarantee repayment of the loan. Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options and non-core business opportunities. debt financing is the potential for personal financial losses if it becomes impossible to repay the loan. 

8. Comparison between debt and equity Point of Difference Debt Equity Definition It refers to issuing  bonds to finance the business. It refers to issuing  stock  to finance the business. Uses For purchasing assets that are more valuable than a party's current ability to pay for them. Can be traded for equity and other advantages by companies. For estimating potential gain in any asset transaction, and for use as purchasing power. Can be traded for debt and other advantages by companies. Types Secured/unsecured, private/public, loan, bond. Contributed capital, gained capital, revenue. Calculation Amount of Equity - Value of Asset Value of Asset - Debt

9. Conclusion Whether business takes debt or equity financing , depends upon the need and requirement of the business. Debt and equity both are solutions that can solve the fund related problems of the business. Both debt and equity have their advantages and disadvantages. It is up to the owner to select which suits the business needs . To know more about it Please click on the link given below…. https://efinancemanagement.com/financial-leverage/debt-vs-equity