Debt Vs Equity Financing

Debt Vs Equity Financing

Abstract

Lease versus purchase options are important to compare when formulating financial decisions. Both have different benefits depending on the situation. A business can take various financing routes. The two commonly used are debt financing and equity financing, which are beneficial. Capital structure is the way business finances assets through some combination of debt, hybrid securities, or equity. Capital structures have several alternatives but only one is advantageous.

Debt versus Equity Financing

The equipment does not depreciate if the company leases instead of purchasing it. A company can deduct the lease payments which are made. Time of payment can result in a larger tax benefit versus if equipment is purchased. The decision to make whether to lease or purchase will be more advantageous in a particular situation. For major equipment purchases an accountant should complete a cash flow analysis. This entails a comparison on tax savings and payments on a sale or lease. For example, if leasing property for both personal and business purposes, a company must deduct only a portion of lease payments that corresponds to business use percentages (Ward, 2008).

Debt financing is taking out a loan to be paid back over a certain time with interest. The financing can be long-term or short-term. Long-term financing applies to land, buildings, equipment, or machinery, which applies to assets a business. Long-term debt financing is scheduled repayments of the loan. The estimated assets continue over more than one year. Short- term financing applies to purchasing supplies, pay wages of employees, and inventory that applies to money needed for the day-to-day operations of the company. Short-term financing is to refer a short-term loan or operating loan. The scheduled repayments are scheduled in less than one year. Examples of debt finance are borrowing from friends or family, drawing on a line of credit on a credit card, drawing on home mortgage, loans from banks, other financial institutions, and loans from venture capitalists, or private lenders (Ward, 2008).

Equity financing is a form of financing a business not including incurring debt. The financing with equity does not require taking out a loan. The reason is because the funding is already coming from an investor in exchange for a piece of ownership in the company.

Examples of equity finance are bringing onboard a friend or family member as an active or silent

partner, finding a similar minded individual who has complementary skills to the owner, and

obtaining an