(Solved Homework): Entrepreneurs must decide between equity financing and taking on a loan for the business…

Entrepreneurs must decide between equity financing and taking on a loan for the business. This decision may be challenging for most small business owners in the situation when they start or they need to expend a business. Therefore, entrepreneurs should evaluate advantages and disadvantages of debt and equity financing and determine which type of financing is best for their business.

Discuss pros and cons of debt and equity financing.

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Determine which type of financing is best for your business.

Provide examples and details that support your position.

Expert Answer

Pros of debt financing

  1. Debt financing provides 100% ownership of your business. Although a bank and other lender are benefited by the success of your business but they do not become partners.
  2. Getting a loan adds to your credit which is always beneficial to your business

Cons of debt financing

  1. Most of the money lenders ask the business owner some kind of guarantee for the loan which includes personal assets like home car etc. This can sometimes create risk if the business fails to succeed
  2. If the business owner fails to repay the debt it becomes bad debt which creates lot of problems for the business.

Pros of equity financing

  1. Equity financing is flexible in terms of loan repayment, it need to be repaid within a specific timeframe, also the business owner’s personal assets are not at risk.
  2. If the company has poor credit history or lack of financial record than equity financing is the most suitable option
  3. Equity financing creates partnership with more knowledgeable and experienced persons which can lead to the success of the business

Cons of equity financing

  1. Profit has to be shared between the equity investors.
  2. Finding the right equity investor is usually a time consuming process.
  3. Sharing ownership can create potential conflict in terms of vision, management style and way of doing the business
  4. Sharing ownership also requires sharing control over the business

Small businesses like retail stores or manufacturing companies should go for debt financing to start a business as risk associated with these sectors are less.

Businesses in the technology and innovation sector should go or equity financing as risk associated with these sectors is more and return on investments are on the higher side.

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