Question

In chapter 10, we looked at bonds and chapter 11 examined the use of stock financing. What are some advantages for a business using either of these methods of financing. Would it be advantageous for a company to use a combination of both?

Answer 1

The Advantages of stock Financing

• The biggest advantage of equity financing is that the investor assumes all the risk. If your business fails, you don't have to pay the money back.
• Without loans to pay back, you'll have more cash available to reinvest in your company. Your company could grow faster than it would if it were saddled with debt.
• A deal with a well-connected venture capitalist or angel investor often comes with other benefits, such as access to key business contacts.

The Advantages of Debt Financing

• You retain full ownership and control of your business, since the lender does not claim equity in the company.
• Once you repay the amount you borrowed plus interest, you have no further obligations to the lender, who has no claim on the future profits of your business. Therefore, if your company is highly profitable, you keep a larger portion of the earnings for yourself than you would if you had to share it with investors who have equity in your business.
• Interest on debt can be deducted from your business' taxes, lowering the cost of the loan to your company.

The decision on the arrangement and combination of debt and equity used to finance
a company’s growth depends on a number of different business factors, especially
the availability of sources of funding, the respective industry in which the company is
operating, and the relevant banking requirements.if the income tax rates are more, it's beneficial for the company to have debt.Debt financing is appropriate for companies which pursue an aggressive growth
strategy, especially when they have access to low interest rates because company directors are sometimes unwilling to dilute their controlling power through only equity financing.a combination of debt and equity is advantageous if debt is available with lower interest.debt , equity has disadvantages individually.A disadvantage in debt finance can be covered by an advantage in equity finance.Debt can stifle a company’s growth because of the high cost of repaying the loan, especially in the case of repaying compounding interest in such cases combination of equity is preferable..