Accounting Assignment Paper: Equity And Debt Financing (Essay Sample)

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Equity Financing
Introduction
Equity financing involves exchanging part of the ownership for the purpose of financial investment in the business. The possession stake coming about because of an equity investment enables the business to partake in the organization's generated profits. Equity includes a perpetual interest in an organization and is not reimbursed by the organization at future dates.
The investment should be well defined in a formally created business entity. An equity stake in an organization can be in form of membership units, as on account of a limited liability company or as normal or favored stock as in an enterprise.
Organizations may build up various classes of stock to control voting rights among shareholders. Similarly, organizations may apply different types of preferred stock. For example, basic stockholders can vote while preferred stockholders for the most part not allowed. However, regular stockholders are rearward in line for the organization's advantages if there should arise an occurrence of default or chapter 11. Favored stockholders get a foreordained profit before normal stockholders get a profit.
Sources:
* Personal Savings
The first place to look for money is your own savings or equity. Personal resources can include profit-sharing or early retirement funds, real estate equity loans, or cash value insurance policies.
* Home equity loans
A home equity loan refers to loan accompanied by the value of the equity in the business. If the business is paid for, it can be applied to generate money from the general value of the business.
* Friends and Relatives
Owners of a start-up business sometimes seek for private financing sources such as parents or friends. This could be in the form of equity financing whereby the friend or relative receives an ownership interest in the business. However, these investments should be made with the uniform process that would be used with outside investors.
* Venture Capital
Venture capital refers to funds that received from companies or individuals in the business investing in small and privately owned businesses. They offer capital to both small and young businesses in exchange for an ownership share of the business. Venture capital firms always do not require taking part in the initial funding of a business unless the company has management records.
Debt Financing
Debt financing involves borrowing funds from creditors with an obligation of repaying both the borrowed funds plus interest at a particular given time. For the creditors, the reward for offering the debt financing is the interest on the amount lent to the borrower. Debt financing can either be secured or unsecured. Secured debt has collateral but conversely, unsecured debt does not have collateral thus putting the lender in a less secure position relative to repayment in case of any anticipated default.
Debt financing may be short term or long term in their repayment terms. Basically, short-term debt is used to fund current organizational activities such as operations while long-term debt is used to finance assets such as buildings and equipment.
Sources of Debt Financing:
* Banks and Other Commercial Lenders
Banks and other commercial lenders are known as the major sources of business financing. Most lenders need a good and robust business plan, positive track record, and adequate securities. These are normally complex to come by for a start- up business. Once the business is underway and profit and loss statements, cash flows budgets, and net worth statements are offered, the company would be required to borrow extra money.
* Commercial Finance Companies
Another key source of debt financing is commercial finance companies. These are usually prioritized when the business is unable to secure financing from other commercial sources. These companies may be more willing to depend on the quality of the collateral to repay the loan than the track record or profit projections of the business.
Advantages of Equity Financing:
* One of the advantage of Equity Financing, is that it enables organizations to use their cash as well as of their investors when they start up their business for all the start-up costs, instead of making large loan payments to banks or other organizations or individuals. So they can receive it underway without the burden of debt on their back.
* Another advantage is that if organizations have made a prospectus for their investors and explained to them that their funds is at risk in their brand new start-up business, they will be able to know that if the business fails, then they will not be guaranteed of their compensation back.
* Depending on who your investors are, they may offer valuable business assistance that you may not have. This can be important, especially in the early days of a new firm.
Disadvantages of Equity Financing:
* Business investors actually do own a share of peoples business; how big this piece is will depends on how much funds invested on it. Most businesses probably do not anticipate giving up control of their business, so they are supposed to be aware of it whenever agreed to take on investors. Investors anticipate a sha...