Five paper graded “A” Debt Versus Equity Financing University of Phoenix ACC/400 Organizations finance operations with both debit and equity financing. Organizations need financing to continue to function. Debt financing and equity financing are different financial strategies that financial managers make a decision about. Debit Financing Debit financing is a means of raising funds to generate working capital used to pay for projects or endeavors that the issuer of the debt wishes to undertake (“WiseGeek,” 2013).
Debt financing is a form of borrowing money to keep a business operating. Debit financing is the act of selling bonds, notes, or mortgages held by the organization. These items are sold and the cash generated can be used purchase larger asset such as buildings. Debit financing usually does not include options of ownership of the organization. Equity Financing Equity financing is another vehicle to raising funds for an organization. Using the equity option raising money from the investor gives the investor a stake in the organization; they become part owner.
This exchange normally is in stock. An advantage of equity financing is there is no repayment. A disadvantage of this option is giving up control of the organization to investors. Alternative capital structure Debt financing and equity financing share a common goal; to raise capital for an organization. Each alternative has advantages and disadvantages. The size and nature of an organization will dictate, which option to take when the need to raise capital presents itself. Advantages of debt financing are a higher return on the investment, lesser taxes, and the rganization will maintain ownership. Disadvantages of debit financing are whereas, the interest is tax deductible it is most likely a high interest rate. Another disadvantage of debt financing is collateral will be required by the lender to secure the loan. An advantage of equity financing is apparent in small business starts up. Personal financing and financing from family and friends will not require repayment during startup, which can be a critical financial time for a small startup business.
Family and friends in this case invest in the future venture with the knowledge that repayment is well in the future or perhaps not at all. Another advantage is some investors could bring with them valuable business knowledge. A disadvantage of equity financing is the investors are part owners in the business. Debt financing is borrowing with repayment and equity financing is receiving finances and giving part ownership to investors.
In the case of a small startup business equity financing with a written agreement to benefit both parties is the better choice. In the case of a large established firm debt equity is a viable choice. The organization is established and maintains ownership, utilizes the tax write off, and enables the organization to make a large purchase or investment in itself. Reference Finance website. org. (2009). Retrieved from http://financewebsite. org WiseGEEK. (2013). Retrieved from http://wisegeek. com