DEBT FINANCING

Debt Financing

Debt Financing

Question 1

Debt Financing

In contrast to equity financing in which investors receive partial ownership in the company in exchange for its funds should not be amortized. In most cases, debt financing does not include any provisions on the ownership of the company (although some types of debt convertible into stock). Instead, small businesses that uses debt financing to take a direct obligation to repay funds within a certain period of time.

Advantages and disadvantages of debt financing

Experts suggest that debt financing can be a useful strategy, particularly for companies with good credit and stable history of revenues, profits and cash flow. But owners of small businesses should consider before you commit to debt financing in order to avoid cash flow problems and reduced flexibility. In general, a combination of debt financing and equity financing is the most desirable for small business. In the area of Small Business Administration publication financing for Small Business, Brian Hamilton listed several factors entrepreneurs should consider when choosing between debt and equity financing. First, the entrepreneur must take into account the extent of ownership and control him or she is unwilling to give up, not only here but in future rounds of funding (Massey and Zemsky 2001). Second, the entrepreneur must decide how to share in the company may be convenient, or the optimal ratio of debt to equity. Third, the entrepreneur should determine what types of financing available to the company, given its level of development and capital needs, as well as to compare the requirements of various types. Finally, as a practical consideration, the entrepreneur should ascertain whether or not the company is in a position to determine the monthly payments on the loan.

Regardless of what type of financing is chosen, careful planning is necessary to ensure it. The entrepreneur should assess the financial needs of business, and then estimate what percentage of the total funds to be received from external sources. Like other types of financing for small businesses, debt financing has both advantages and disadvantages. The main advantage of debt financing is that it allows the founders to retain ownership and control over the company. In contrast to equity financing, the entrepreneurs have the opportunity to take key strategic decisions, as well as to maintain and reinvest more company profits (Breneman and Finney 2007). Another advantage of debt financing is that it gives small business owners with greater financial freedom than equity financing. Debt obligations are limited to the period of loan repayment, after which the creditor has no further claims on the business, whereas equity investors' claim does not end until their stock is sold. In addition, debt that is paid on time can increase the small business in credit ratings and make it easier for different types of funding in the future. Debt financing is also easy to manage, because it usually lacks the complex reporting requirements that accompany some forms of equity financing. Finally, debt financing tends to be less costly for small businesses over a long period, ...