Debt Versus Equity Financing Paper

Debt Versus Equity Financing Paper

Lease versus purchase options will be discussed in this paper as well as compare and contrast discussing what debt financing is, what equity financing is, and which alternate capital structure is more advantageous accordingly.

Debt financing is when a company raises money for working capital expenditures by sell bonds, bills, and notes to potential investors. As money is lent companies can become creditors and receive a promise that the interest will be paid back on the debt. Also, in debt financing raising money or capital can be through shares of stock in public offering, which is also called equity financing. The act of raising money for a company’s activities by selling common stock to individuals investors is equity financing. Money paid in return is shareholders ownership interests within an organization. Companies raise money by issuing stock. Also through debt financing money is raised. This is also when companies borrow money accordingly.

Debt vs. equity financing is one of the most important decisions facing managers who need capital to fund their business operations. Debt and equity are the two main sources of capital available to businesses, and each offers both advantages and disadvantages ("Debt vs. Equity Financing", 2004). Debt financing involves loans that must be paid back over a period of time where equity financing takes the form of money obtained by investors in exchange for ownership shares within a company.

Both debt and equity financing are key components to business to obtain capital for funding operations and growth. According to "Debt vs. Equity Financing" (2004), deciding which to use or emphasize, depends on the long-term goals of the business and the amount of control managers wish to maintain. Ideally, experts suggest that businesses use both debt and equity financing in a commercially acceptable ratio. This ratio, known as the debt-to-equity ratio, is a key factor analysts use to determine whether managers are running a business in a sensible manner. Although debt-to-equity ratios vary greatly by industry and company, a general rule of thumb holds that a reasonable ratio should fall between 1:1 and 1:2 ("Debt vs. Equity Financing", 2004).

In conclusion, many companies will depend on equity financing in the beginning stages of business and this is because it is difficult to have debt until a company receives a cash flow accordingly.

References
Debt vs. Equity Financing. (2004). Retrieved from http://www.enotes.com/debt-vs-equity-financing-reference/debt-vs-equity-...