We will know about the Debt Financing Vs Equity Financing. We have answer of Why is debt financing better than equity financing?
Meanings
Debt Financing
Debt Financing means borrowing money from lenders with promise to pay certain percent interest annually. To get debt financing, he/she need to keep mortgage as security. It is less risky than equity financing.
Equity Financing
Equity Financing means borrowing money from the investors in exchange of ownership. It is long term financing and permanent in nature. It is expensive financing as there is dilution of the ownership of the company.
Debt Financing Vs Equity Financing
Following is the details information:
| S.N | Debt Financing | Equity Financing |
|---|---|---|
| 1 | Debt Financing Means borrowing money without giving ownership. | Equity Financing is borrowing money from investor in exchange of ownership. |
| 2 | Debt Financing is obligation of the company. | Equity Financing is the ownership of the company. |
| 3 | It is temporary in nature. So, it is short term finance. | It is permanent in Nature. It is long term finance. |
| 4 | The return is in the form of interest and principle amount. | Return in the form of dividend. |
| 5 | Debt falls in low risk investments. | Equity falls under high risk investment. |
| 6 | Security is necessary obtaining deb financing. | Nothing is required for equity financing. |
| 7 | The return in debt financing is fixed and regular. | The return on equity financing is irregular and variable. |
| 8 | Holders who provide debt is called Lenders | Holders who provide equity is called investors. |
Hence, these are the difference.
Other Important Links:
1. Notes of Entrepreneurship: CLICK HERE
2. BBS 4th Year all subjects notes pdf: CLICK HERE
Frequently Asked Questions:
a. What is the difference between debt and equity financing?
b. What are four key differences between debt and equity?
c. Why is debt financing better than equity financing? or Is Debt Financing or Equity Financing Riskier? , Is Debt Cheaper Than Equity? or What is the main benefit of debt financing?
Ans: Following is the reason
a. Debt financing does not get any ownership of the company. So dilution is not necessary.
b. It is less expensive source of growth capital if the company is growing exponentially. Only interest and principle need to be paid.
