Debt and equity financing

• Debt advantages


  Funds are usually readily available and can be acquired at short notice

  Increased funds should lead to increased earnings and profits

  Interest payments are tax deductible

  Flexible payment periods and types of debt are available

  It will not dilute the current ownership in the business
• Debt disadvantages


  There is an increased risk if debt comes from financial institutions because interest, bank charges and government changes may increase

  Security is required by the business

  Regular repayments have to be made

  Lenders have first claim on any money if the business ends in bankruptcy

  Debt can be expensive e.g. interest must be repaid
• Advantages of equity


  Doesn’t have to be repaid unless the owner leaves the business

  Cheaper than other sources of finance as there are no interest payments

  The owners who have contributed the equity retain control over how that finance is used

  Low gearing (uses resources of the owner and not external sources of finance)

  Less risk for the business and the owner
• Disadvantages of equity


  Lower profits and lower returns for the owner

  The expectations that the owner will have about the return on investment

  Long, expensive process to obtain funds this way

  Ownership is diluted i.e. the current owners will have less control