Advantages of debt financing PDF

Preview

Summary

accounting...

Description

1. Advantages of debt financing Maintaining ownership - unlike equity financing, debt financing gives you complete control over your business. As the business owner, you do not have to answer to investors. "Equity financing is the process of raising capital through the sale of shares. Equity financing is used when companies, often start-ups, have a short-term need for cash." (Banton, 2020). Advantages of Equity financing: - Selling ownership from a company might lead to building relationships with more experienced people, thus, learning from their knowledge and experience; - As soon as you do not need to pay any fixed monthly payments, you have enough time to kick start; - You can use this option even if you have some credit problems or poor credit history; - You do not need to do any repayments. Disadvantages of Equity financing: - You can experience some conflict of interests because sharing the ownership means being forced to consider others' thoughts, ideas, and vision; - You will lose some control of the company after selling ownership; - You will have to share the profit of your company with investors (actually, usually this is the reason why people invest - they want to have some profit from it) Disadvantages of debt financing Remember, if your business fails you are still obliged to repay your debts. Credit rating - failing to make repayments on time will affect your credit rating, which may affect your chances of securing future loans. Some examples of Debt financing are debenture, bonds, and loans. I think, that choosing between Equity financing and Debt financing I would choose the second option. First of all, I do not want to lose control of a business that I am about to buy, which means that I will not control it from the very beginning. Another reason is that debt financing is usually considered to be cheaper. I would take a bank loan and, after buying the business, issue callable bonds to raise capital. 2. As for future business owners, I think that if you have no issues with your credit history and do not want to share the ownership (thus, lose control of the company), you should choose debt financing for your business. However, you should be very careful when taking debts because you might overestimate your abilities to repay and end up bankrupted.

3. I think, that after completing this week's Learning Journal I became totally sure that I want everything to be stable, predictable, and to have as few risks as possible. In Ghana, there is a saying, "if you want to do something? Do it yourself!" - and I believe, it is about me. I do not really want to rely on others, so sharing ownership seems very uncomfortable for me.

References: Caroline Banton. (July 1, 2020). Equity Financing. Retrieved from https://www.investopedia.com/terms/e/equityfinancing.asp James Chen. (March 9, 2020). Debt Financing. Retrieved from https://www.investopedia.com/terms/d/debtfinancing.asp...