The world financial manager ended with the choice between debt financing and equity financing when searching for finance for their business. Both types have certain benefits and demerits. A little demisitas will help towards the decision-making process.
Pro and Cons Debt Financing
Debt financing is basically when you take loans from financial institutions, banks or government institutions that need to be repaid for a fixed period of time. Debt financing has certain advantages and losses, listed below.
Loan or bank institutions do not say in business internal decision making and do not have ownership in business. There are tax advantages because the loan interest can be deducted from taxes and you can usually plan and combine payments in your budget because both the principal and interest rates are known.
Loan payments can be used for working capital and cause cash inflow problems ultimately affect growth.
Flexibility in connection with payment time is mostly non-existent.
Too much debt can cause your business to be identified as a high risk entity and therefore affects the prospect of increasing additional capital in the future.
Your business may be vulnerable if your cash flow is affected for several reasons, such as a decrease in sales. This is especially true for new businesses
You may have to provide business assets as a guarantee or guarantee.
Equity financing is when an investor finances your business in exchange for shareholdings or bets in business. Investment entities reclaim investment from future profits. The advantages and disadvantages of equity financing are as follows:
You don’t need to pay money and therefore it’s less risky than a loan.
You can access network investors, add more credibility to your business.
Your working capital is not affected because the compulsion of loan payments and business growth gets encouragement.
In terms of business fail, you don’t need to pay investment.
The loss of autonomy since investors has certain control over the function of your business and also share your profits.
You must consult with investors when making decisions, which can lead to disagreement and friction
Sometimes returns taken by investors can exceed interest rates paid on loans.
Finding the right investors is time consumption and resources.
Both of these forms are important financing tools for business and what decisions are used to utilize depending on the long-term business goals and the number of autonomy or controls that you want to save for your business. Ideally business needs to use both tools according to specific situations and needs. It is usually said that new businesses may be in a better position if applicable to equity financing and then gradually also includes debt financing towards its portfolio. According to experts, the ideal debt-to-equity ratio for business must be between 1: 1 to 1: 2.