Companies are always torn between using either equity and debt financing. The problem facing the companies is the fact each of these funding approaches has both downsides with positive sides. Equity financing is about giving a portion of the company or selling a specific percentage of its stock in exchange with cash( Fianto et al., 2018). In most cases, entrepreneurs are not willing to part with equity because it means losing part of the company. Equity financing means that the company management must render a specific degree of control to another party, and this means that decision making must also involve a third party. Equity financing means that the business must be willing to share its profit with an external party. Also, the equity investors expect some return on their money. In most cases, such a return may be much high than the interest from debt financing ( Fiantoet al., 2018). Lastly, most entrepreneurs do not like equity financing because of the potential conflict that arises in many of such cases. With equity financing, a third party also has a degree of control over the company. Therefore, decision making can be a point of concern.
People should choose debt financing because, despite the restrictions, there is more flexibility regarding company control. The control means that there cannot be any conflicts in decision making, and this can make it easy to decide and execute plans. Also, the interest in debt is sometimes much cheaper than the return on equity investment the company intends to give to the equity investors ( Silaghi, 2018). Therefore, the company is likely to benefit by using debt-equity. Also, the debt-equity is flexible because the principle of payments is stated in advance, making it easy for the company to pay the money. Therefore, I will go for the debt payment because of the flexibility and reduction in the cost.
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References
Fianto, B. A., Gan, C., Hu, B., &Roudaki, J. (2018). Equity financing and debt-based financing: evidence from Islamic microfinance institutions in Indonesia. Pacific-Basin Finance Journal , 52 , 163-172.
Silaghi, F. (2018). The use of equity financing in debt renegotiation. Journal of Economic Dynamics and Control , 86 , 123-143.
