Equity Finance Vs Debt Finance

Corporate Finance is the very important area of Investment Banking. It has mainly two arms – Equity Finance & Debt Finance.

Any Company can raise Money by two ways -

01) Equity Finance – In case of Equity Finance, Company sells its ownership (Shares) to the investors and raise money for its Expansion, Growth & Future Projects.

The advantage of Equity Finance is that, here the company does not have to pay any interest rate on the amount it has raised from investors because it has raised this amount through selling its ownership stake. So even if the company does not do well, the investors will lose their money but the Company don’t have to give back that money to the Investors.

And suppose if the Investor wants to exit from the Company, he/she has to find another investors and sale his stake to that Investor.

The Disadvantage of Equity Finance is that, Here the company has to raise money at the cost of selling its ownership. And thus the ownership of promoters of the company reduces or gets diluted.

02) Debt Finance – In Case of Debt Finance, Company goes into a Debt & issues Corporate Debt Certificates to the Investors and raise money for its Expansion, Growth & Future Projects.

The Advantage of Debt Finance is that, here the company does not have to sell its stake to raise money so that the ownership interest of the founders of the company does not gets diluted. However, This Debt is secured by Company’s Assets so in case of default, the company may have to sell its some of the Assets.

The Disadvantage of Debt Finance is that, excessive debt makes the company less lucrative for investments and increase the chances of its default.

In short, A Company can raise Capital to finance its various projects by any one of the above 2 Financing Methods.