In the accounting industry financing is an important concept. Many companies would not be operable without acquiring some for of financing options. Although there are many types of financing, the two that will be discussed in this paper are debt financing and equity financing. Also this paper will give two examples of each type of financing and discuss which option will be the best choice for the company that will utilize them. Debt Financing
Many businesses use debt financing which is money that a business borrows to run the company. The interest rate amount at the beginning of financing the loan is the most important fact to consider, however this is a factor that some companies fail to investigate or research. There are two categories of debt financing; short term and long term. Operating loans are short term debt financing because the repayment that is scheduled if for a period of less than one year. An example of short term debt financing is a line of credit. Long term debt financing are for loans that are for a period of more than one year or the life of the asset. Some examples of assets that a business would purchase with long term financing are machinery, buildings and property. (Ward. 2009) Equity Financing
Whereas debt financing is used for operation purposes raising capital by selling stock to various investors is the objective of equity financing. Selling the company’s stock gives a respective portion of ownership of the company to investors in exchange for cash which involves equity financing. (2010) Some examples of equity financing for small businesses are; an equity loan, seed financing, Mezzanine Financing and M & A financing. An equity loan can be a debt that was converted to equity, Mezzanine Financing is when a business is ready for an (IPO) Initial Public Offering and M & A is when two companies can either acquire the other or merge together. Overview
A company can use one or both method of financing. For example, if a company wants to get machinery then the company can use the long term debt financing option. However if the same company wants to expand the company’s growth, equity financing can be a key factor. There are some early stage investors that take high risk ventures to guide a business they are interested in helping or acquiring. Determining which type of financing to use depends on the reason and assets available.
Ward, S.(2009).Debt Financing.retrieved from http://shinfocanada.about.com/cs/finanicng (2010). Equity Financing.retreived from http://www.investinganswers.com