Advantages of Using Debt and Equity Financing.
Debt and equity are strategies used to raise funds to finance or grow an upcoming business. Money borrowed from lenders to finance the businesses is known as the debt. Payments of debt are agreed upon between the lender and borrower. Equity is the amount of money that people use to invest in the business. The two resources are merged together to come up with a company or business. Some companies do partnership programmes, including the money lenders so as to recover the debts. Companies that take debts do so to improve the levels of production in a company. The essence of the partnership is to ensure that the companies are not under pressure to pay the debts. Debts paid in instalments allow room for the companies to make profits and gains. The debts help companies to get more production machinery and labour provision that increase the production levels. Debts are used to pay for rent and purchases of buildings used as stores or offices. Debts are of advantage as they come in handy when business are being started. Accumulated debts are paid by ensuring that all the money is channelled towards a company’s production. Equity, on the other hand, does not need to be repaid as it is the investments that an individual or the company puts forth. The use of equity is highly recommended as income is saved and does not go to payment of debts. The balance between the use of equity and debts as a method of getting capital for a business should be maintained to avoid losses in the production. The balancing of the sources of capital helps companies to manage funds and clear debts on time. The use of equity capital also helps to generate funds that can be used to open other branches or other business plans. Equity financing deals with sharing of profits between the stakeholders of a business and this is fair enough to all the people who invest. Profits are shared among investors depending on the percentage of investment that they put forth in the business. Business partners can learn, share ideas and create networks through the partnerships created by equity financing. Equity financing is also reliable for individuals who are not comfortable with sharing information and decision making about their businesses. Both financing approaches are reliable as long as the right managerial tactics are followed and the type of business considered. Debt financing can be preferred when starting up businesses that attract quick profit. Businesses that take time to give profit can be financed by equity method.