Question

7. Which is better from the perspective of the company seeking funding, debt financing or equity financing
8. How are interest rates determined on business loans?

Answer 1

7. Debt financing is better from the perspective of the business:

As debt financing is cheap and does not lead to a loss of control on the other hand , equity financing is dilutive in nature and leads to a loss of control, it is a expensive form of raising finance comparison to debt.

8. Interest rates on business loans depends on :

• The credit score of the person taking the loan: if the credit score of the business owner is low, then the rate of interest will be high.
• The monthly turnover of the business
• The collateral given for the loan: secured business loans will carry a cheaper rate of interest than the unsecured business loans.
• The nature of the business: some types of business are more secure than the others. A startup firm is usually considered a risky venture.
• Time the business was running for: if the tenure of the for which the business was running is high, then the rat of interest will be low.

Keeping these factors in mind, a appropriate rate of interest for the business loan is determined.