EQUITY AND DEBT

Equity and Debt

Equity and Debt

The primary advantage of debt financing is that it allows the founders to retain ownership and control of the company. In comparison with equity financing, the entrepreneurs are able to make key strategic decisions and also to keep and reinvest more company profits. Another benefit of debt financing is that it provides small business owners with a greater degree of financial freedom than equity financing. Debt obligations are restricted to the loan repayment period, after which the lender has no further claim on the business, whereas equity investors' claim does not end until their stock is sold. Furthermore, a debt that is paid on time can enhance a small business's credit rating and make it easier to obtain various types of financing in the future. Debt financing is also easy to administer, as it generally lacks the complex reporting requirements that accompany some forms of equity financing. Finally, debt financing tends to be less expensive for small businesses over the long term, though more expensive over the short term, than equity financing(Peterson, 1999).

The major drawback of debt financing is that it requires a little business to make regular monthly payments of primary and interest. Very immature companies often experience shortages in money flow that may make such regular payments difficult. Most lenders offer severe penalties for late or missed payments, which may include ascribing late fees, taking possession of collateral, or calling the lend due early. Failure to make payments on a lend, even temporarily, can adversely affect a little business's credit ranking and its proficiency to get future financing. Another disadvantage linked with debt financing is that its accessibility is often limited to established businesses. Since lenders mainly seek security for their capital, it can be tough for unproven businesses to ...