Debt and Equity Financing Organizations require funding in order to operate and meet strategic plans. That being said companies have the option of using debt financing and equity financing. Each of these strategies varies, whereas debt financing requires borrowing money and equity financing involves using stakeholder’s funds for operation. The characteristics among the two are clearly defined for each option of business financing; some which are beneficial and others having drawbacks. All the same, many companies consider both options and make the final decision based on organizational goals. Debt financing requires a business taking a loan, which needs to be repaid. For instance, consider a business looking to expand their services or increase their production capability. Additional money is required in both these scenarios and so long as the company has a good credit rating and funds to cover their repayment, this option is usually feasible. However, there are some downsides to debt financing, including having a negative effect on cash flow. In addition, to negative cash flow and repayment requirements, financing may be limited and a company may face high interest rates. Donner (2013), “High-interest payments during slow growth periods could put your business at risk for insolvency (more debts than assets)” (para. 3). Moreover, the amount of debt to assets can appear negatively on financial statements. While the aforementioned detail is somewhat negative, companies still opt for debt financing because ownerships is retained, leaving freedom to the business owners. According to Tsuruoka (2004), equity financing involves taking on investors, who assume a stake in your business, diluting ownership. Part of the quid pro quo of equity financing is that investor’s repayment is made when the company makes a profit. The opposite is true as well, if a company does not make a profit, investors don’t get paid. In addition, owners lose antinomy as investors now have a stake in the organization. However, bearing these factors in mind, there is no repayment requirements which lower cash flow. Money can then be reinvested into the organization, allowing for
