EQUITY AND DEBT FINANCING

Equity-based and Debt/Borrowing-based Sources of Business Finance

Equity-based and Debt/Borrowing-based Sources of Business Finance

Introduction

The following paper is about highlighting the differences between the equity financing and debt financing, therefore, numerous differences and proper description presented for the understanding of the readers. Similarly, different characteristics are mentioned to make a choice in terms of going for a long term source or a short term. Thus, based on the personal experiences an appropriate advice is given by the writer whether to go for debt or equity financing.

Discussion

Debt Financing

Debt financing is all about borrowing the money, which in other words means that the borrower retains sole ownership of what he or she purchased, yet an obligation is imposed to pay the lender the original money borrowed, with an additional extra amount of interest because of the reason they would lend the borrowing in the first place. For instance, Steve borrowed money from Clark to buy a car, now Clark need not to worry about the car, whether Steve crash the car or burn the car because Steve is obligated to pay back Clark the original amount and the interest. This is what actually similar to purchase the bonds of an enterprise.

Equity Financing

Equity financing is all about selling the ownership to generate financing or to get money (Investopedia, 2013). Considering the above mentioned characters of the example, Steve want to make purchase of the car, and asked money from Clark. Clark agreed to provide financing on an agreement that car will be shared between two on certain days. Since both of them have ownership in car, therefore, both having interest in the well being of the car and if someone crashes or destroy the car, both will lose their investment. This is similar to the purchasing of the ...