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Chapter 10 (Debt vs Equity Financing)

Chapter 10 (Debt vs Equity Financing) - Advantages 1...

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Debt versus Equity Financing Management 305 I. Debt Financing - money that your business borrows and is obliged to pay back. Advantages: 1. Debt does not dilute ownership interest in the company 2. Lender has no control over how the business is run 3. Principal and interest obligations are known amounts which can be forecasted and planned for. 4. Interest paid on the loan is generally tax deductible 5. Less complicated than equity financing which requires compliance with state and federal securities laws Disadvantages : 1. Must at some point be repaid (which requires additional cash flow) 2. Usually requires collateral &/or personal guarantees 3. Too much debt restricts growth (b/c of the high cost of servicing the debt &/or restrictions placed by lenders) 4. Risky loans result in high interest rates 5. Too much debt restricts future fund raising II. Equity Financing – money received in exchange for a share of ownership
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Unformatted text preview: Advantages : 1. Business is not obligated to repay monies (even in cases of bankruptcy) 2. Involvement of high-profile investors can assist in managing the firm & may increase credibility of a new venture—value added 3. More cash available to the new venture because there are no debt payments 4. Business assets do not have to be pledged as collateral Disadvantages : 1. Dilution of ownership interest 2. Less (or loss of) control due to sharing of ownership 3. Loss of future profits—portion of profits paid to equity investors 4. Dividend payments may not be tax deductible (e.g. C-Corporations) Sources: http://biztaxlaw.about.com/od/financingyourbusiness/a/debtvsequity.htm http://smallbusiness.findlaw.com/banking_financing/source/business_events/be1_5debtvsequity http://www.bookrags.com/research/debt-vs-equity-financing-eom/...
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