{"id":6092,"date":"2019-04-20T09:00:35","date_gmt":"2019-04-20T03:30:35","guid":{"rendered":"http:\/\/capitalante.com\/?p=6092"},"modified":"2020-05-05T11:26:51","modified_gmt":"2020-05-05T05:56:51","slug":"debt-financing-vs-equity-financing","status":"publish","type":"post","link":"https:\/\/capitalante.com\/debt-financing-vs-equity-financing\/","title":{"rendered":"Debt Financing Vs. Equity Financing"},"content":{"rendered":"

In order to finance the operating cost and expansion plants, the companies usually utilize profits earned from business operations. But as a start-up company, you do not have any revenue or profits. So, in order to get fund, you are left with only two options namely Debt financing, and Equity Financing. In this column, we will discuss what is debt financing and equity financing, the advantages, and disadvantages of Debt Financing and Equity Financing, and a comparison between Debt Financing and Equity Financing, Debt Financing Vs. Equity Financing.<\/span><\/p>\n

What is Debt Financing?<\/span><\/strong><\/h2>\n

When a company requires cash to finance several requirements such as the expansion of business or set up a new unit, the company makes use of debt financing.\u00a0 Debt financing is to borrow a fixed sum from the lender i.e. Bank or NBFCs with an assurance that you will pay back the principal amount along with interest within a fixed rate and time.<\/span><\/p>\n

Advantages of Debt Financing<\/span><\/strong><\/h2>\n

Here are the advantages of debt financing.<\/span><\/p>\n

Control: The lenders give you a loan with a fixed interest rate which is to be repaid within a specific time they are the creditors of the company. The lender does not have any ownership right or any role to decide how the owner should run the business.<\/span><\/p>\n

Tenure of the loan repayment period: The principle and interest payable are calculated at the time of the loan, you can choose the repayment period i.e. long term or short term in accordance with profitability and cash flow of the company.<\/span><\/p>\n

Tax deduction: The current tax structure allows the companies to deduct the interest paid on the borrowed capital from the gross income by running a business.<\/span><\/p>\n

Disadvantages of Debt Financing<\/span><\/strong><\/h2>\n

Here are the disadvantages of debt financing,<\/span><\/p>\n

Qualification:<\/span> In order to get a loan you need to furnish the Balance sheet, Profit and Loss account, business turnover for the last 3 years. In addition to this, the lender verifies the credit history, repayment behaviour in the recent past, etc.<\/span><\/p>\n

Collateral Required:<\/span> Lenders in order to give loans hold the assets of the company as collateral i.e. as the security of repayment of the loan.<\/span><\/p>\n

Regular payments:<\/span> Irrespective of loss or profit, you need to pay back the principal along with interest in the fixed schedule. The business which has experienced declining revenue or sales will create repayment default.<\/span><\/p>\n

Impact on business:<\/span> Since you need to repay the loan at a fixed time so, you can run short of money for the expansion of your business i.e. growth of the business.<\/span><\/p>\n

\"Debt<\/a><\/p>\n