Hello Donnie. I agree with your remarks that debts and equity capital are primary sources of capital that can be used to finance a project. On the one hand, I concur that although debts can be used for a finance project, this can be problematic. Compared to capital equity, debts can cause instability considering that they require to be repaid through interests (Van der Weele, 2005). Secondly, debt contracts must be repaid in all circumstances except when the business has defaulted. For instance, there are arguments that rigid debt contracts and unexpected information primarily caused a crisis in Latin America. Moreover, in some cases, there are restrictions regarding how much the borrowers can get finances in terms of debts. Sometimes, the borrower can only get debts that is equivalent to a fraction of their wealth or their level of profitability (Van der Weele, 2005). Therefore, I support your posting that debts are not always a good option for financing projects and this can put the business at risk.
Further, it is also imperative to note that the risks increase when the business is required to repay its debts even in bad financial times. Therefore, I agree that whenever possible, business owners should try as much as possible to avoid using debts as a source of capital. On the other hand, equity capital is more favorable than debts in financing projects (Van der Weele, 2005). For example, there are potential stabilization effects in that the sale of equity securities of one agent is likely to make it less attractive to another agent because of price reduction. Nonetheless, this source of capital is subjected to large fluctuations especially due to pressure created by exchange rates. However, when compared to debts, in case of a financial crisis, projects financed to equity capital are likely to recover quickly compared to those financed through debts.
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Reference
Van der Weele, J. (2005). Financing development: debt versus equity (No. 038). Netherlands Central Bank, Research Department.
