Equity Financing vs. Debt Financing: What's the Difference? by J.B. Maverick

TL;DR - Equity is selling part of your business. Debt is taking loans. There are pros and cons to both.

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Topic Tags - Financing, fundraising, equity, debt, cash flow, debt-equity ratio, tax-deduction

Questions answered:

  • What is equity financing?
  • What is debt financing?
  • What are the pros and cons of both?

Summary:

  • Equity’s pros: there is no obligation to repay the funds acquired from equity financing. There are no required payments or interest charges, and because of this, equity financing does not increase the financial burden on a company.
  • Equity’s con is that you are selling a portion of your company, and you must share profits and work with your new partners for large decisions. The most common way to rid yourselves of your partners is to buy them off.
  • Creditors favor low debt to equity ratios.
  • Loan’s pros: lender has no control over your business, interest repayments are tax-deductible, loan repayments are predictable and completely quantifiable.
  • Loan’s cons: you have to pay it back. If you don’t you may lose your collateral. “The downside to debt financing is very real to anybody who has debt. Debt is a bet on your future ability to pay back the loan.”

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