Debt vs. Equity: What's the Difference?

Following the financial crisis, the federal government in 2009, lowered the FED rate 11 times as part of its effort to encourage companies to continue borrowing even during hard economic times. Recently, laws have also changed ensuring that the interest on the debt remains steady over the long-term to guarantee the sustainability of debt. Brigham & Ehrhardt (2020) argues that before 2007, several companies took up lots of debt during the boom years, and most of this loan was short-term debt (pg. 601). When the financial crisis started in late 2007, the banks stopped issuing short-term credit as they struggled with their bankruptcies. In my opinion, and based on Brigham & Ehrhardt reasoning, it is the short-term lending deals and the high-interest rates on loans that significantly contributed to high rates defaults. The Fed acted by lowing interests to record low to promote long-term lending and affordable rates to sustain companies. Therefore, the best way for US companies is to obtain long-term debt financing from financial institutions. Other possible suitable ways are to fund capital structure through long-term government bonds.

In July 2019, the American average monthly prime lending rate was at 5.5%, by October it had dropped to 4.99%, and by Jan 2020 it was 4.75%. Companies have been enjoying low-interest rates on loans for quite some time now. Companies seem to be even comfortable in very high debts, and they continue to take more and more loans. FED significantly reduced the rate during the 2007-2009 crisis, and this seemed to have worked towards correcting the financial problems. FED has kept the rate low since then, and it looks like this rate will remain low for a very long time. In my opinion, debt would be the future way of financing business capital structure, provided there are proper internal structures for companies to borrow only when there is a need. Debt is more sustainable, especially when the FED has control of the banks not to lend too high to generate illegal profits through unnecessarily high-interest rates and government protectionism of the economy. Equity is highly risky, especially when shareholders have trust in managers to keep the shares high, managers are human, and too could go wrong.

References 

Brigham & Ehrhardt (2020). Financial Management: Theory & Practice. Cengage Learning Publishers