What is Equity and Debt Financing

What is Equity and Debt Financing | Types | Example 2022

What is Equity and Debt Financing | Types | Example 2022:- Debt means borrowing money, and debt financing mean borrowing money without giving away your ownership rights. Debts finance means having to pay both the interest and the principal at an express date; however, with strict conditions and agreements for the reason that if debt conditions are not met or are failed, then there are severe consequences to face.

What is Equity Financing

Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills or have a long-term goal and require funds to invest in their growth. By selling shares, a company is effectively selling ownership in their company in return for cash.

Equity Finance vs Debt Finance

There are a number of key differences to bear in mind when you’re considering which of these funding methods to choose. These include:

Repayment

With debt finance, you’re required to repay the money plus interest over a set period of time, typically in monthly installments. Equity finance, on the other hand, carries no repayment obligation, so more money can be channeled into growing your business.

Ownership

Equity investors buy a stake in your business, meaning that your own shareholding decreases, whereas with debt finance you retain full ownership. However, it can be worth having a reduced percentage of the business if the equity investor provides a lot of value (in the form of both money and non-financial resources, such as expert guidance and access to contacts) that helps you to create a larger, more successful company. Think of it this way: would you rather own 100% of a £100k company or 70% of a £1 million company?

Security

A lender may ask the borrower to pledge an asset as security for the loan, such as property or equipment. If the borrower can’t repay the loan, the lender may claim the asset to get their money back. With equity finance, however, you don’t need to put up collateral.

Access to finance

If you’re a start-up with no trading history or physical assets and you don’t want to use personal security, you might find it difficult to secure debt finance, at least from traditional lenders. Equity investors are often willing to back companies that are considered too high risk by a lot of debt finance providers.

Fundraising process

If you’re in a hurry to raise cash for your business, then equity financing probably isn’t your best option. It can take a considerable amount of time to find the right investor, and then you have to negotiate the terms of the deal and facilitate the due diligence process, among other things. There’s also a lot more legal work involved. Debt finance is usually more straightforward and you can often receive the funds in a matter of a few weeks or even days from some providers.

 

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Major Source of Equity Finance

There is a major source of Equity Finance:

  • Crowdfunding: Crowdfunding is where a number of people each invest, lend or contribute small amounts of money to your business or idea. This money is combined to help you reach your funding goal. Each individual that backs your idea will usually receive rewards or financial gain in return.
  • Business angels: Business angels (BAs) are wealthy individuals who invest in high-growth businesses in return for a share in the business. Some BAs invest on their own or as part of a network. BAs have often experienced entrepreneurs and in addition to money, they bring their own skills, knowledge, and contacts to the company.
  • The stock market: Joining a public market or stock market is another route through which equity finance can be raised. A stock market listing can help companies access capital for growth and raise finance for further development.

 

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Conclusion: If you have any queries regarding Equity and Debt Financing, you can contact us via email and our email id is mbahugunaandco@gmail.com.

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