Equity vs Debt Funding

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Equity vs Debt Funding

Equity Funding

Equity Funding is a process of raising fresh capital by selling shares of the company to public, institutional investors, or financial institutions. The people who purchase shares are referred to as shareholders of the company because they have gotten ownership interest in the company. Companies raise money because they could have a short-term need to pay bills or they could have a long-term objective and require resources to invest in their development.

One of the most sought techniques of raising money, apart from public issue, is via Venture Capital. Venture Capital (VC) funding is a method of raising money via high net worth individuals who are looking at various investment opportunities. They provide the firm with the needed capital to sustain business in exchange of shares or ownership in the company.

Equity financing is somewhat different from debt financing, where funds are borrowed by the business to meet liquidity requirement.

Let us look at a few Pros and Cons to Equity Financing:

Equity vs Debt Funding

Debt Funding

When a firm borrows money to be paid back at an upcoming date with interest it is known as debt funding. It could be in the shape of a secured as well as an unsecured loan. A company takes up a loan to either fund a working capital or an acquisition. In return for lending the cash, the institutions become creditors and collect a promise that the principal and interest on the debt will be paid.

Debt Funding is a time-bound activity where the borrower needs to repay the loan along with interest at the conclusion of the decided tenure. The payments could be made monthly, half yearly, or towards the end of the loan period.

Debt financing is a costly way of raising finances, because the company must involve an investment banker who will structure big loans in a methodical way. It is a feasible option when interest costs are low, and the returns are safer.

Here are a few Pros and Cons to Debt Funding:

Equity vs Debt Funding

The pros and cons we saw for Equity and Debt Funding respectively will help you decide when to go for which. Equity Funding is safer if you are trying to achieve long term goals and Debt Funding makes managing budgets and allows you to retain ownership of your business. Ideally, to meet liquidity needs a company can raise finance via both equity as well as debt financing.