Debt Financing vs. Equity Financing: An Overview
When financing a company, "cost" is the measurable cost of obtaining capital. With debt, this is the interest expense a company pays on its debt. With equity, the cost of capital refers to the claim on earnings provided to shareholders for their ownership stake in the business. KEY TAKEAWAYS When financing a company, "cost" is the measurable cost of obtaining capital. With equity, the cost of capital refers to the claim on earnings provided to shareholders for their ownership stake in the business. Provided a company is expected to perform well, debt financing can usually be obtained at a lower effective cost. Read More: 5 WAYS TO IMPROVE YOUR CREDIT SCORE Debt Financing When a firm raises money for capital by selling debt instruments to investors, it is known as debt financing. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid on a regular schedule. Equ...