Debt finance poses a great advantage when it comes to controlling the business. The company maintains complete control of the decisions and governing of the business. The relationship between the lender and the company ends at repayment of the loan. The financier does not participate in the company’s decision-making and running, allowing it to run its affairs on its terms provided the agreement discussed between the two parties is honored.
Financing through debt is also disadvantageous since lends are expected to be repaid on exact dates according to the agreement written by the two parties. For companies struggling financially or who do not have a constant and predictable cash flow, challenges with loan repayment may be faced (Rascher, 225). This situation can lead to severe cash declines, which are a threat to the company’s survival.
Equity finance allows long-term planning for a company since the investors do not expect immediate returns on their funds. They become part of the company co-running businesses and overseeing projects they have invested in, expecting dividends as per the profits made (Rascher, 229). Money is, therefore, not taken out of the company; instead, it ensures cash flow and company growth, proving this funding advantageous.
On the contrary, equity finance leads to a loss of complete control of the company. Stockholders become partners in business and therefore expect to have a voice in running the company. Different opinions from many members on a panel can eventually lead to conflict due to disagreements in management styles. However, this can be curbed by incorporating preferred stocks where stakeholders are limited on voting and decision-making, maintaining an intact administration and control.
When choosing a funding source, it is essential to consider the financial state of the company. One factor to consider is the business’s cash flow (Rascher, 237); if it is unpredictable, picking debt finance will not be in the company’s best interest. Another influence is capital required; if the funds needed are huge, equity financing is advisable; if manageable, it is sensible to go the debt way. The control aspect is also a major issue when choosing the type of funding. Since some company owners wish to remain the sole governors of their businesses, they may prefer loans. However, this can be maintained when involving shareholders by ensuring that they stay with the highest percentages of shares.
Work cited
Rascher, Daniel A. “Debt and Equity Financing.” Financial Management in the Sport Industry. Routledge, 2021. Pp. 220-243.