Weighing The Pros & Cons Between Debt And Equity Financing


One of the most significant advantages of equity financing is that there is no obligation to repayment, and it can enable the business to grow exponentially by providing additional working capital. Deciding between the choice of whether or not to seek equity capital over debt financing relies on several factors that are directly related to the company.

From accessibility to enhancing cash flow, maintaining control and keeping the principal owners, the debt to equity ratio indicates how much of an organization’s funding is provided by equity and debt. If your company is in the same position, here’s what you should know between deciding debt financing or equity financing.

Debt Financing

Debt financing, in some cases, comes with restrictions on the organization’s operations that may hinder the company from making some strides in utilizing the opportunities beyond the primary core of the business. Licensed moneylenders look keenly on a slightly small debt to equity ratio, which can work in favor of the company if it needs financing soon.

Advantages of Debt Financing

• You have complete control of your business. Once you’ve completed paying any debt or instant loan, you end the relationship with the licensed moneylender.
• Expenses are easy to be predicted.

Disadvantages

• Your company’s growth could be jeopardized if recession times hit hard on your company. If your company fails to grow as much as you expected, the debt could keep growing and prevent your business from stabilizing.

Equity Financing

The most notable advantage of equity financing is that there is no need to repay the funds acquired through it. While the company’s owners may want it to be successful and provide the investors with a good payoff on the amount they invested, the owners will always give the investors a good return, excluding required payments or interest charges present in debt financing.

Equity financing, like consolidation loans in Singapore, provides the owners with complete freedom since there is no financial burden on the company and no necessary monthly payments related to equity financing. While the company will have a vast potential to grow, this doesn’t necessarily mean that there is no downside for equity financing.

Advantages of equity financing

• The company has more capital to grow.

• Owners need not make additional payments and interests necessarily.

Disadvantages

• To gain funding, you have to give the investor a large proportion of the company. From sharing profits to consulting, with new stakeholders in place, a lot more time will be spent on critical decisions. In the end, the only way to remove the investors will be to buy them out, which could prove to be more expensive and take even longer.

Conclusion

Equity financing and debt financing each have their pros and cons. Equity financing’s significant advantage is that the money acquired need not necessarily be paid, and it places no additional burden to the organization. Debt financing, on the other hand, gives the business total control of its operations. Before choosing the ideal funding, however, you need to decide whether or not your business can handle the associated cons.

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