Author Topic: Small-Business Financing: Debt vs. Equity  (Read 1093 times)

Offline Md. Limon Hossain

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Small-Business Financing: Debt vs. Equity
« on: February 26, 2011, 06:50:44 PM »
Small-Business Financing: Debt vs. Equity
Small-business owners can choose from two basic types of financing -- debt and equity. This article looks at the advantages and disadvantages of each type and how they may be used for different purposes.

...

    * Since debt and equity are accounted for differently, each has a different impact on earnings, cash flow and taxes, and each also has a different effect on leverage, dilution and a host of other metrics.
    * Debt can be a loan, line of credit, bond or even an IOU -- any promise to repay borrowed amounts over a certain time with a specified interest rate and other terms.
    * When you finance with equity, you are giving up a portion of your ownership interest in -- and control of -- the company in exchange for cash.
    * While equity financing can be used for many different purposes, it is usually used for long-term general funding and not tied to specific projects or time frames.
    * The mix of debt and equity that best suits your company will depend on the type of business, its age, and a number of other factors.
...
« Last Edit: February 26, 2011, 06:54:13 PM by Md. Limon Hossain »
Md. Limon Hossain
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Offline psycho saint

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Re: Small-Business Financing: Debt vs. Equity
« Reply #1 on: March 03, 2011, 08:32:36 PM »
Dear Lemon bro,can u explain the topic a lil more?
i am looking forward to have some more idea about this topic...
RAFAT
creative.bd

Offline Md. Limon Hossain

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Re: Small-Business Financing: Debt vs. Equity
« Reply #2 on: March 04, 2011, 12:01:57 AM »
Dear Mr. Saint:
Thanks for your post…!! I hope you will not mind if I say you have some spelling mistake in this post. You should more careful while writing in forum. You’re writing style should be more developed & try to give-up short form like”u” instead of “you”.

Whatever lets discuss about the topic.
Business owners can utilize a variety of financing resources, initially broken into two categories, debt and equity. "Debt" involves borrowing money to be repaid, plus interest. "Equity" involves raising money by selling interests in the company.

Now you can ask what the advantages of debt compared to equity?

That Are:

1)   The lender does not have a claim to equity in the business; debt does not dilute the owner's ownership interest in the company.
2)   A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth.
3)   Except in the case of variable rate loans, principal and interest obligations are known amounts which can be forecasted and planned for.
4)   Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the company.
5)   Raising debt capital is less complicated because the company is not required to comply with state and federal securities laws and regulations.
6)   The company is not required to send periodic mailings to large numbers of investors, hold periodic meetings of shareholders, and seek the vote of shareholders before taking certain actions.

Now Disadvantages of debt compared to equity:

1)   Unlike equity, debt must at some point be repaid.
2)   Interest is a fixed cost which raises the company's break-even point. High interest costs during difficult financial periods can increase the risk of insolvency. Companies that are too highly leveraged (that have large amounts of debt as compared to equity) often find it difficult to grow because of the high cost of servicing the debt.
3)   Cash flow is required for both principal and interest payments and must be budgeted for. Most loans are not repayable in varying amounts over time based on the business cycles of the company.
4)   Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options and non-core business opportunities.
5)   The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can carry.
6)   The company is usually required to pledge assets of the company to the lender as collateral, and owners of the company are in some cases required to personally guarantee repayment of the loan.
« Last Edit: March 05, 2011, 09:16:08 PM by Md. Limon Hossain »
Md. Limon Hossain
Department of BBA
ID: 082-11-523
Cell: +8801717885679
E-mail: limon-hossain@diu.edu.bd And limon.hossain@yahoo.com
Daffodil International University

Offline psycho saint

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Re: Small-Business Financing: Debt vs. Equity
« Reply #3 on: March 08, 2011, 05:02:09 PM »
thank u for elaborating the topic.as far i am concern i did not make any spelling mistake, what i did is i used some short forms.anyway i will be careful in future before posting anything on your topics..
RAFAT
creative.bd

Offline Md. Limon Hossain

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Re: Small-Business Financing: Debt vs. Equity
« Reply #4 on: March 08, 2011, 05:38:22 PM »
Dear Mr. Saint:
Please don’t mind. I just told you about short form & caring about post only to sustain our image to others. I like your all good post. You know well that our forum is viewed world wide. That’s why all should more careful about our post.

ALL IS WELL   
Md. Limon Hossain
Department of BBA
ID: 082-11-523
Cell: +8801717885679
E-mail: limon-hossain@diu.edu.bd And limon.hossain@yahoo.com
Daffodil International University