Question

Compare and contrast debt versus equity financing. (1 page answer )

Answer 1

Lets discuss about these two individually first

• when a firm raises money for working capital by selling debt instruments to individuals or institutions, then the debt financing occurs
  
• The creditors will be the individuals or institutions as listed above
  
• The firm should ensure that the capital and interest on the debt will be paid back
  
• When a company needs money, it retains the money through debt financing
  
• The company/firm will be selling the fixed income products inorder to obtain debts for the capital for their growth
  
• investors in debt are interested in principal protection, but in some cases some want a return in the form of interest
  
• It provides fund for the companies at lower rates

Equity financing

• It allows companies to raise the capital through shares in an enterprise
  
• It refers to the sale of an ownership interest for raising funds for the use of business works
  
• It offers the money ranging from small amout to huge one either
  
• It allows financing with private and public companies too.
  
• governed by rules imposed by a local or national securities authority in most jurisdictions
  

COMPARISON

• Both are used for the investment of finance
  
• Used to gain financial resources
  
• Debt means borrowing money to be paid back and it also includes intrest
  
• Equity means raising fund by selling companies intrest
  
• debt does not mix the ownership interest in the company where as the equity does
  
• Lender has no direct claim on the future future profit of the business in the debt But in equity it does
  
• Intrest in debt is retained from the companies tax
  
• Debt can be obtained very easily and faster where as equity does some effort
  
• In debt, there is no need of any worry or meeting with share holders regularly
  
• Equity can take time to repai but debt must be repaid in certain time
  
• Interest is a fixed cost which raises the company's break-even point.in the debt financing
  
• In debt financing its a burdain to pay the capital and intrest in regular interval of time
  
• There are restrictions to the instruments attained by debts in a company
  

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