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Debt vs Equity Financing

Equity is the worth of an asset minus the total of all liabilities on that asset.

Equity Financing is the course of increasing capital by the sale of shares in a business. The sale of ownership parts to increase finances for the purpose of business is equity financing. Equity financing has a broad spectrum to increase ownership shares. Friends and family members can be asked to invest funds and get ownership shares accordingly. Giant initial public offerings can be made to raise funds from millions to billions. Financing from other private companies can also be considered in equity financing. Equity financing is different from debt financing. Debt financing is made when money is borrowed and has to be paid back, usually with interests. 

Debt is the money borrowed by an entrepreneur to use in funding a business that he/she could not afford under normal conditions. A debt arrangement means that the borrower is given money under the condition that borrowed money will be paid back at a later date, usually with interest. There can be different types of loans. Debt can be issued either to an individual borrower or to a business. 

In certain cases, borrowing money is much better than giving up equity.

Reasons Why Borrowing Money Is Usually Better Than Giving Up Equity

1.  When taking debt, the lender has no claim to equity in the business. Ownership remains the same. Business operation and bookkeeping decisions remain with the owners/entrepreneurs/executive management. Equity charges a part of your business, forever. Equity financing divides the ownership of a company.

2.  When net profit is increased, the lender will only be given the borrowed money and the interest in it. If business progress and rewards are larger, the entrepreneurs will reap the rewards. The lender will have no claim or share in the business rewards/profits. But if you go for equity financing, in the long run, the shareholders will be getting the share in net profits. In short, future profits will be distributed among equity holders and your profit share will be reduced.

3.  Interests on debt can be subtracted on the business’s tax returns. Borrowing money can be a gift to entrepreneurs. The cost of interest decreases taxable profit that your business earns, thus it reduces the tax expense in your company/business. Large corporations/businesses also use this strategy to reduce the tax expense. If you get cash from equity instead of debt, then you will be paying off the cash to the equity holder for your business. But when debt is taken, the interests are deducted from the taxable profit. So, the expense of interests is reduced and the debt will also be paid back eventually.

4.  There will be no need to seek the vote of shareholders in the business for making certain decisions. Debt is good if you want to keep the business and the whole ownership with you. In the case of equity financing, the shareholder’s vote will be compulsory in making decisions for the growth of business, investments, expenses and other internal decisions.

5.  Debt boosts discipline and discipline ensures success. Debt brings about a discipline in spending and reduces expenses in the company. Debt is not merely taken to increase discipline, but it is also a plus point in holding unnecessary expenses in the business. A check and balance system is maintained on business bookkeeping. Cash flow is regularly matched with financial statements and balance sheets. Business operations are routinely done. 

Conclusion

It is a myth that debt is never good in any kind of business or situation. Many times, debt is proven to be better than giving up equity. Debt can be paid back. But once the equity is given, other shareholders in the company appear.

Check out America's Best Bookkeepers

About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

Dollar Sign with arrow illustrating growing equity

Equality and equity are the two terms which generally speak about the egalitarianism but have their own distinct features intrinsically; equality refers to the state of equality where all resources, status and funds are distributed equally among the total population present, whereas equity refers to the state where the available resources, status and funds are distributed per the requirements of each individual of the total population present. Running a corporation smoothly as well as efficiently is not an easy task.  It requires smart strategies inclusive of systematic planning to lead a business in the direction to produce maximum profits that ultimately result in the welfare of business.  Equity is one of the most important tools used by enterprises in order to generate fruitful results per their desires. Equity, in terms of business management, refers to the achievement of a status under the shadow of prescribed motto of the business organization which tends to provide its desired status. In order to achieve or generate equity, the following steps can be implemented by an enterprise effectively:

  • Appointment of an Accurate Management Team:

A management team provides you with the managing of all tasks which are to be accomplished in a way to generate greater profits and welfare of a company. Each company tends to work for its status and for high income.  To attain that and achieve equity, a highly qualified and experienced management team must be hired to competitively work hard in order to generate the desired results in turn forcing the board of directors to invest more and ultimately gain more. Equity is the state of getting what is desired per your needs.  This can only be possible if one already knows the requirements and goals of an organization that must be achieved on time. These goals are made possible by hiring a competitive team who can manage all tasks and challenges confidently.

  • Budgeting and Bookkeeping:

Budgeting is a design which portrays the optimal distribution of all resources and funds available in order to generate a business efficiently. Bookkeeping itself is the art of keeping records of all transactions held in an organization.  But, the question is, how can it promote equity?

And the answer is simple: by providing accurate results of the transactions held in a business corporation. As bookkeeping portrays all transactions of a company, it tends to promote a track record of revenue generated as well as expenditures.  This further illustrates the truth of whether a business is running successfully or not. Cash flows in the records are also a tool to determine the state of equity in a business. Therefore, in case of loss, one can come up with the strategies to overcome it and conclusively reach the state of equity.

Final Note

Equity in a business corporation is necessary for its smooth running as well as successful proceedings. It must be achieved in a way where your organization gets advantages or benefits at low costs. Equity is the state where you achieve what you require or desire and it can only be done through thorough planning and management of a business.  Only then does it generate fruitful results.

Check out America's Best Bookkeepers

About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.