Equity financing and debt financing are two different ways of raising capital for a business. Equity financing involves selling a portion of the business ownership to investors in exchange for funds. Debt financing involves borrowing money from lenders and paying it back with interest.
Some of the main differences between equity financing and debt financing are:
- Control: Equity financing reduces the control of the original owners, as they have to share the decision-making power and profits with the new investors. Debt financing does not affect the ownership structure, as the lenders have no say in the business operations or dividends.
- Cost: Equity financing has no fixed cost, as the investors are paid according to the performance and profitability of the business. Debt financing has a fixed cost, as the borrowers have to pay the principal and interest regardless of the business outcome.
- Risk: Equity financing shifts some of the risk from the owners to the investors, as the investors bear the loss if the business fails. Debt financing increases the risk for the owners, as they are liable for the debt even if the business fails.
- Tax: Equity financing has no tax benefit, as the dividends paid to the investors are not deductible from the taxable income. Debt financing has a tax benefit, as the interest paid to the lenders is deductible from the taxable income