Debt Versus Equity Financing Paper Sene
Debt versus Equity Financing Paper
Seneca Porter
Acc/400
November 7, 2014
Theresa Pekron
Debt financing is when an organization raises money for working capital or capital expenditures through the process of selling bonds, bills, or notes to a person or institutional investors. Basically, it is the use of borrowing to pay for your organization needs. The return for lending out money, the individual or institution then become creditors and obtain a promise that the principal along with the interest on the debt will be reimbursed. The advantages of debt financing includes: The bank or lending institution not having any say in the way you run your organization nor do they have any ownership, The relationship between your organization and the bank ends once the debt is paid, the interest on the loan is tax deductible, and the loan can very well be short-term or long-term. The disadvantage of debt financing is that money must be paid back within a fixed amount of time, your organization can have cash flow issues if you rely heavily on debt, carrying too much debt can make your organization high-risk by investors which can hinder your ability to raise capital through equity financing, debt can cause hardship if your organization is not profiting. Debt financing can be applied to any organization, for example my supervisor Matt Shevitz can ask for a long-term loan to pay for a new sound board for our music studio. He would have to ensure that everything financially is up to par before asking for a loan, as well as make sure he has profited enough to pay the loan back. Equity financing refers to the sale of an ownership interest to raise money for business commitments. The advantages of equity financing provides less risk of having a loan, because you do not have to pay it back, especially if your organization cannot afford to take on debt. You migrate into the investor’s network which can make your organization more credible, most investors do not
Seneca Porter
Acc/400
November 7, 2014
Theresa Pekron
Debt financing is when an organization raises money for working capital or capital expenditures through the process of selling bonds, bills, or notes to a person or institutional investors. Basically, it is the use of borrowing to pay for your organization needs. The return for lending out money, the individual or institution then become creditors and obtain a promise that the principal along with the interest on the debt will be reimbursed. The advantages of debt financing includes: The bank or lending institution not having any say in the way you run your organization nor do they have any ownership, The relationship between your organization and the bank ends once the debt is paid, the interest on the loan is tax deductible, and the loan can very well be short-term or long-term. The disadvantage of debt financing is that money must be paid back within a fixed amount of time, your organization can have cash flow issues if you rely heavily on debt, carrying too much debt can make your organization high-risk by investors which can hinder your ability to raise capital through equity financing, debt can cause hardship if your organization is not profiting. Debt financing can be applied to any organization, for example my supervisor Matt Shevitz can ask for a long-term loan to pay for a new sound board for our music studio. He would have to ensure that everything financially is up to par before asking for a loan, as well as make sure he has profited enough to pay the loan back. Equity financing refers to the sale of an ownership interest to raise money for business commitments. The advantages of equity financing provides less risk of having a loan, because you do not have to pay it back, especially if your organization cannot afford to take on debt. You migrate into the investor’s network which can make your organization more credible, most investors do not
References: DEBT VS. EQUITY FINANCING: WHICH IS THE BEST WAY FOR YOUR BUSINESS TO ACCESS CAPITAL?. (2009). Retrieved from http://www.nfib.com/article/ital-50036/