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Debt Verses Equity Financing Paper Debt Verses Equity Financing Paper Charlotte Hughes University of Phoenix The subject described in this paper compares and contrasts lease verses purchase options. The paper will define what debt financing and equity financing are and provide examples of each of the financing options. Debt Financing Debt financing is the selling of bonds, bills, and notes to raise money for working capital and capital expenditures. Debt financing are either short-term or long-term. Businesses can use debt financing to raise funds for a new company.
When an institution lends money it becomes a creditor and expects repayment. Examples of debt financing are SBA-backed loans and line of credit. SBA-backed loans are Small Business Administration loans. These loans are for start-up companies and existing companies. SBA does not make the loans directly. A bank makes the loan. SBA guarantees half of the loan, which lessens the banks risks. Line of credit loans funds can be drawn when needed. When entrepreneurs have raised equity capital for leveraging funds a line of credit is issued.
Lines of credit are due in one year. Lines of credit cover cash shortages during seasonal fluctuations. Equity Financing Equity financing raises money for company activities by selling stock to an individual or company. Shareholders receive ownership in the corporation when the money is paid. If an entrepreneur invests 100,000 in a start-up company the entrepreneur will own each share in that company. Equity financing is important for investors to acquire ownership interest in a company. Examples of equity financing are equity loans and first round financing.
Equity loans are a line of credit that allows a person to borrow money and convert debt into equity. First round financing is a convertible bond. This financing is for a company ready to market. Capital Structure Advantage Debt financing has more advantages than equity financing. Debt financing allows founder of companies to retain ownership and control of their company. Debt financing provides have a greater amount of financial freedom. Debt financing proves to be less expensive for small business and debt financing does not have complex requirements for reports.
Conclusion Most business use both debt and equity financing. If a company does not have enough equity it could prevent the company from securing or replaying loan. Acquiring no debt causes a company to be at risk, and the business cannot grow. Reference Debit Financing. (2008). Retrieved from http://www. bizstartsmilwaukee. com/BizFiles/PDFs/2008_BS_Libary_Debt_Financing. pdf 7 Major Types of Debt Financing. (1995-2011). Retrieved from http://www. ychange. com/ychangeblog/equity-financing/