Advantages And Disadvantages Of Equity
Equity: Advantages and Disadvantages
Debt financing is just one side of the whole picture. The capital structure of a business is made up of debt financing and equity financing. These two sources have their own way of benefiting a company as well as creating some limitations for the company in terms of their usage.
Some advantages that a company might incur using equity financing are as follows:
The biggest benefit one can achieve is that the investors commit their funds to the company and the projects it plans to carry out. They do not have to be given any return until the profits have been released through the projects the investment was made in or through stock market flotation or a sale to new investors etc. So it 's not an obligation
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Taking in account all the information available to business regarding debt and equity, businesses tend to opt for the choice that it believes suites well with the nature and the situation of the business for which it 's looking for funds. The nature and situation of businesses vary to a higher from among themselves due to which decisions vary as well.
(Fleming) states that taking a look at the traditional business e.g. retail, such find debt financing more suitable to start up the business. This is because new traditional businesses do not have a lot of funds to work on with and they are a less risky deal as compared innovative sectors so debt financing may be proffered by them. He further adds that business with new ideas and innovation e.g. those of technology sectors that introduce products not currently available in the market would prefer equity financing because debt would not be easy to gain due to high level of risk attached of whether it will be success or not. But the investors may be interest to fund such projects as high risk may lead to even higher
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He stated that the debt to equity preference will be determined by the relative weightage given to either assets or the growth opportunities. He stated that when firms will look into financing new assets they well opt of debt financing. This is because those assets will provide returns relatively quicker with which the interest payments could be made. However, in the case of new growth opportunities present, the equity issuance will be a way to go since the firm will have a high value in response to the growth of the firm because of which higher finance would be generated by the firm.
So, in deciding between equity issuance or debt financing, businesses will look in to the nature and the situation it is expected to be in. The pros and cons will be determined and the option most suitable on the basis of the information viable will be opted for by the firms. No sure short answer is present as to whether equity is better or debt
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