Question

Why are company's assets have been funded by some combination of lenders and company owners.

175 word by the instructor

Answer 1

The Advantages of Equity Financing

• Without loans to pay back, cash is available to reinvest in your company.
• A deal with venture capitalist comes with other benefits, such as access to key business contacts.

The Disadvantages of Equity Financing

• You must share ownership, control and profits of your company with your investors.
• It takes time and effort to find the investors.
• Raising equity capital is complex. Examples: compliance with laws and regulations, reports to and meetings with shareholders

The Advantages of Debt Financing

• You retain full ownership and control of your business.
• Once you repay the loan, you have no further obligations to the lender, who has no claim on the future profits.
• Interest on debt can be deducted from your business's taxes.  

The Disadvantages of Debt Financing

• Since debts must be repaid, it could be difficult if your company experiences cash flow problems.
• Debt could be detrimental to growth, since you'll have to use part of the revenue to repay debt.
• A high debt will be viewed as high-risk, making it hard to attract equity investors.

The decision to use equity or debt to finance your company ultimately comes down to how much control you wish to maintain over your business. However, an early-stage company that could take years to generate profit is likely to struggle with a high debt load. At the same time, start-ups have a hard time attracting venture capital until they show strong profit potential. Most experts suggest that businesses use both debt and equity, in a reasonable ratio.