Question

Discuss the difference between equity and debt financing and state which type you would prefer if you were an entrepreneur. Be specific.

Answer 1

Differences between debt financing and equity financing are as follows-

A. Debt financing will be representing the creditors of the company whereas equity financing will be representing the ownership of the company.

B. Debt financing will be having a fixed repayment obligation whereas equity financing will not be having any fixed repayment obligation.

C. Interest which are payable to debtholders are generally tax deductible in nature and they will reduce the overall cost of capital whereas equity shareholders dividend are not tax-deductible.

D. Equity shareholders generally will having a residual claim where as debtholders will be having a preferential claim on the assets

E .Debt Financing will generally be having a cost of financial distress where the equity shareholders will not be having any kind of cost of financial distress

I would be looking for or debt financing because it will be reducing my overall cost of capital, if I am able to make a higher amount of return on investment, it will also help me in order to help my business to grow and expand, and do not liquidate my holding so that I would not be wanting to lose any kind of control over the company.