Cost Financing And Equity Financing

1559 Words Jun 17th, 2016 7 Pages
Debt and Equity1
Moving right along, outlined next will be several funding options available for start-up businesses that enable people, like me, to be able to put our dream in motion. There are two types of capital that can be raised, debt and equity. Now some would think that as long as there are funds there to work with, regardless of how they were procured, the end result would be the same. However, that is not the case. Debt financing and equity financing have significant differences in how they affect the business’s bottom line and in how they are acquired. For instance, the interest paid on a business loan (option for debt financing) is tax deductible, therefore decreasing the amount of taxable income and increasing overall profits, where equity financing (dividend interest) is not. So why wouldn’t you use just debt you ask? Because you need your business to prove that it has the ability to pay its obligations, and if you take on too much debt, your business will look, and could become, insolvent (unable to pay its obligations) (Gitman, 2009). Therefore, we need the right mix of debt and equity financing to keep the business solvent AND benefit from any deductions. Generally, a good debt ratio is 1:2 (meaning for every dollar of debt you have outstanding, you have $2 in assets). This could vary based on your business industry of course, but for the most part, 1:2 is a good ratio. Since we have already started speaking a great deal about debt financing,…
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