Debt vs Financing

Debt versus Equity Financing Paper

ACC 400

July 4, 2014

Debt versus Equity Financing

Financing is important and needed when conducting business. The needs of a business will depend on its size and the type of business. Businesses may need financing for new machinery, construction, developing new products, or starting up the business. At times, financing can be accomplished internally. There are times, however, that a business must look externally for financial backing. There are two sources of financing that will be discussed, debt financing and equity financing. Also, an advantageous alternative capital structure will be explored.

Debt Financing

Debt financing is accomplished when the corporation raises capital by selling bonds or notes to a lending institution or person. Debt financing creates an obligation that must be repaid. There are both secured and unsecured loans that can be used. Secured financing requires a collateral to be used as assurance that the debt will be repaid. Unsecured loans are solely based on the credit worthiness of the company borrowing the money.

There are three repayment terms that lending institutions utilize for repayment of loans; short term loans, intermediate-term loans, and long term loans. Short term loans are paid back within six to eighteen months. Intermediate term loans are paid back within three years, while long term loans are repaid in 5 years.

There are advantages and disadvantages to debt financing. The most advantageous is the lack of ownership in the business. Interest on the loans is tax deductible. The relationship between the company and the lender ends once the debt is paid in full. The disadvantage to debt financing is the vulnerability of the company’s financial health due to incurring debt.

Equity Financing

Equity financing is the process of a corporation raising capital by selling shares in the company. Initial public offerings are used by many organizations to...