Debt and equity financing

2007-05-02 10:04:19

( Financial )



Debt and equity financing has both advantages and disadvantages to a businessman. But choosing the kind of financing you need should depend on the current status of your business including its historical performance and opportunities for growth. There are financial costs of getting either debt and equity financing but the most important aspect you should look into when deciding the kind of financing you will avail of is the interest rates you will have to pay and the advantages of debt and equity financing to your business profitability.

You must first prepare a thorough business plan that identifies different opportunities in the market and the capitalization you will need in this endeavor. Then you must weight the advantages of debt financing over equity financing. Debt financing is better for businesses that have a solid business operation with a lot of real estate assets and equipments. This is because this track record will enable the business to acquire debt financing easily and the interest they will have to pay are lower compared to equity financing. In addition, this is one of the most cost effective ways to capitalize your business because you can expand your operations while maintaining full ownership of the business enterprise.

However, you should note that you also need to out up collateral when you want to avail of debt financing such as real estate properties or stocks so your loan can be secured. Creditors will also look into the cash flow statement of your company to know if you are generating enough money to pay the interest rates and the principal amount you lent. On the other hand, if you are just starting out your business, then equity financing is the best alternative for you. This is because you do not need to borrow money in equity financing since other people will invest in your business for capitalization.


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