Debt vs Equity Financing

Debt financing: includes bank loans, notes payable, leasing, and issuing bonds

Equity financing: includes issuing common or preferred shares

Debt Financing

• Definition: Involves borrowing funds that must be repaid, typically with interest.

• Types: Bank loans, notes payable, leasing, issuing bonds.

• Advantages:

  • Interest payments are tax-deductible.

  • Does not dilute ownership.

• Disadvantages:

  • Obligations to repay, regardless of business success.

  • Potentially affects cash flow and credit ratings.

Equity Financing

• Definition: Involves raising capital by selling shares of the company.

• Types: Issuing common or preferred shares.

• Advantages:

  • No obligation to repay investors.

  • Can provide access to additional resources and expertise from investors.

• Disadvantages:

  • Dilution of ownership and control.

  • Potentially higher costs of equity compared to debt in the long run.