Debt Versus Equity

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Debt Versus Equity Financing
Debt versus Equity Financing is an interesting subject in that it is one of the most important decisions a company will face when choosing to finance a new project. Debt Financing is a more traditional approach. In Debt Financing a company seeks financing from a financial institution or a private debt through a group of investors in the form of a loan. The loan will have set terms such as interest, repayment schedule, and payment amounts. The company will be obligated to make payments on the loan regardless of the amount of revenue coming in. The loan also often has some form of collateral to guarantee the loan. Debt Financing has the advantage of being a fast way to obtain money to finance a project. Another advantage would be the fact that the costs of the loan are fixed they do not change unless renegotiated.
Equity Financing is the securing of financing through the issuance of stock or an equity loan both of which give a portion of ownership to the lender. Stock is issued to investors which gives the investor part ownership of the company. This is a much greater risk to the investor purchasing the stock. If the company does fail then the stockholders lose their investment. Equity loans are based on the value of the company’s assets. Equity loans are also common place in the private world in the form of home equity loans. This is where money is borrowed against the value of the borrowers’ personal home. Equity must exist in the item being brought to the lender. For instance when looking to obtain an equity loan on a house, the house must either be paid for completely and the value equal to or greater than the requested loan amount. If the home already has a mortgage then the mortgage must be paid down enough that there is a level of available equity or value above the mortgage. For instance a home valued at $150,000 with a remaining…...

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