Business Financing: Debt vs Equity


Unless you have an existing wealth empire to build on, chances determine that you’ll require a financing resource to begin your business venture. Numerous financing options exist, including bank loans, crowdfunding, factoring services, and venture capital firms. 

To raise capital for business requirements, companies initially have two categories of financing options, including equity financing and debt financing. It can be challenging to anticipate which financing method will be feasible for your business. Most companies utilize a combination of both financing options, but they usually choose to select one of them for their business purposes. The selection depends on which funding source is more effortlessly accessible for the company. The debt-to-equity represents how much of a company’s finance is provided by debt and equity. Cubicle to Cloud virtual business

Concept of Equity Financing

Equity financing includes selling a portion of a company’s equity in exchange for capital. For instance, the owner of ABC Company might need capital to raise the business capital. The owner decides to leave 10% of ownership in the company and sell it to a creditor for investment. That creditor now owns 10% of the company’s shares and has a right to raise voice in all the business decisions. 


The main benefit of equity financing is that there’s no requirement to repay the money acquired through it. Of course, business owners aim to provide equity investors with a fruitful return on their investment without required payments or interest rates. 


Equity financing does not add a financial burden to the potential company. Since no required payments are associated with equity financing, the company has excess capital to invest. However, this doesn’t justify the downfalls of equity financing. 

To gain funding for your business, you’ll have to give the investor a percentage of your company’s shares. For this purpose, you might have to share the profits and consult with them anytime you decide about the company. The only way to exclude the investors is to buy them out, which would probably be more expensive than the original amount they gave you. CorpNet. Start A New Business Now

Concept of Debt Financing

Debt financing includes borrowing and paying the money back with an interest rate. The most common type of debt financing is a loan. Often, debt finance comes with restrictions on the business’s activities that might prevent it from taking benefit of opportunities from outside the empire of its core business. Creditors prefer a relatively lower debt-to-equity ratio, which benefits the company if it requires additional debt financing. 


There are numerous benefits of debt financing. Primarily, the lender will have no control over your business. Once you repay the loan, the relationship with your lender will end. Secondly, the interest rate you pay is tax-deductible. Additionally, it will be easy to forecast expenditures because debt payments don’t fluctuate. 


What if your company experiences financial crises? What if your business doesn’t progress as well as you want it to? Debt is a kind of expenditure, and you must pay the payments regularly. This can hinder your company’s ability to grow. Download A Free Financial Toolkit

Debt Financing vs. Equity Financing

Suppose ABC Company is striving to expand its business and determines that it requires $70 million to fund its growth.  

To obtain the amount, ABC Company opts for the combination of equity and debt financing. The equity financing sells a 20% equity stake in the business to the investor in exchange for $20 million in capital. However, for debt financing, the company borrows a business loan of $40 million from the bank, with an interest rate of 4%. You must pay the loan back in four years. 

There could be a diversified combination with the above example that would result in numerous outcomes. For instance, if ABC Company raises capital with only equity investment, the owners would have to lay off more ownership, diminishing their share of future profits and decision-making power. 

On the contrary, if the company decided to apply only debt financing, their monthly expenditures would be higher, leaving little cash for other purposes. A more significant debt amount must be paid back with interest. 

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