Debt vs Equity Financing
Debt VS Equity Financing
ACC/400
September 2013
Debt VS Equity Financing
Most businesses are use financing for one reason or another. Whether it be startup, day to day operations, or financial stability financing is a fundamental part of operations. This summary will address what debt and equity financing are and how they are beneficial in business and everyday life. The summary will also explain which method is most beneficial in business operations.
By definition debt financing is “when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.” (Investopedia, 2012) In other words it is a means of borrowing money from an outside source with the promise to return the principal. There is generally an agreed-upon level of interest which is added to the principal balance. In business debt financing can be extremely helpful; although the term tends to have a negative effect on balance sheets most startup companies often turn to debt to finance their operations. Even the healthiest of corporate balance sheets will include some level of debt.
In relation to finance, debt is also referred to as “leverage.” There are many examples of debt financing one of the most common just happens to be my particular line of business, which is banking. Banks and financial institutions are the primary source for debt financing. However debt financing can come from private companies or even friends and family. The key would be that the interested party is borrowing a sum with the promise to pay back the debt with interest. Another example of debt financing would be financing a car with a dealership. The dealership more or less gives you the vehicle on consignment with your promise to pay
ACC/400
September 2013
Debt VS Equity Financing
Most businesses are use financing for one reason or another. Whether it be startup, day to day operations, or financial stability financing is a fundamental part of operations. This summary will address what debt and equity financing are and how they are beneficial in business and everyday life. The summary will also explain which method is most beneficial in business operations.
By definition debt financing is “when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.” (Investopedia, 2012) In other words it is a means of borrowing money from an outside source with the promise to return the principal. There is generally an agreed-upon level of interest which is added to the principal balance. In business debt financing can be extremely helpful; although the term tends to have a negative effect on balance sheets most startup companies often turn to debt to finance their operations. Even the healthiest of corporate balance sheets will include some level of debt.
In relation to finance, debt is also referred to as “leverage.” There are many examples of debt financing one of the most common just happens to be my particular line of business, which is banking. Banks and financial institutions are the primary source for debt financing. However debt financing can come from private companies or even friends and family. The key would be that the interested party is borrowing a sum with the promise to pay back the debt with interest. Another example of debt financing would be financing a car with a dealership. The dealership more or less gives you the vehicle on consignment with your promise to pay
References: Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). Financial accounting: Tools for business decision making (4th ed.). Hoboken, NJ: John Wiley & Sons. Equity Financing. (2013). Retrieved from http://www.investinganswers.com/financial-dictionary/stock-market/equity-financing-1523 Debt Financing - Pros and Cons. (2012). Retrieved from http://entrepreneurs.about.com/od/financing/a/debtfinancing.htm Brigham, Eugene F., (2010) Fundamentals of Financial Management