The two main sources of capital that are available to businesses are debt financing and stock financing. Both these have their respective advantages and disadvantages and must be considered only after you have made a comparative study of both.

What is equity and debt financing?

When you secure interest based loans that are repayable, from banks as well as other financial institutions, then that process is called debt financing. On the other hand equity financing is when you obtain the money from investors and provide them with a share of the ownership in the business. Debt financing verses stock financing can be evaluated to consider which one is better.

There are various things that need to be considered some of them are as follows.

1. Control over the business: In case of debt financing you/the entrepreneur retains control over his business but this does not happen in case of stock financing. This is an important advantage of debt financing as your debtors will have no say in the running of the business and also have no rights to question the management about any of its decisions. In case off stock financing you have to sell the shares of your company in order to make money. Your shareholders will have the full rights to question the management of the company as they too are partly the owners. So if you have to take any major decision, then you will have to take the approval of all the shareholders before you can proceed with the decision.

2. Repayable capital: The capital that is generated does not need to be paid back in case of stock financing. Whatever loss or profit the company undergoes the investors have a share in it. The investors invest with the motive of getting a share in the profit of the company. The company is not even obligated to repay the investment. In case an investor wants to leave the business, then he or she has to sell off the stake to someone else. This is one of the greatest advantages of stock financing. However, in case of debt financing the company has to pay back a certain amount even if it is running in loss. This burden of paying every month can be very damaging for a company if the company is not making profits. If the company dos not pay, then the assets of the company are at risk.

Thus, both the options have their own advantages and disadvantages. However what you choose depends entirely on the requirements and plans of the company.

Useful Resources:

Stock market investing – Get information on stock market investment program.