Business is either operated through equity financing or debt financing. Equity financing is done mainly by the owners or the investors where they pay a certain amount of money and receives a share of the company. It is the primary funding of any business. In this finance, the company does not have to repay the fund. This will not create any future financial burden or restrictions in cash flow. Very often people mix up equity financing with debt financing which is incorrect. Debt financing mainly deals with the borrowing of money without permitting the ownership. It has severe conditions on payments in precise principles on specific dates.
More about debt financing
Debt financing is the cash borrowed from outside on fixed principles with a pre-determined maturity date. Debts are either taken in the form of bonds or loans. The principle of the transaction does not depend on the structure of the investment. The amount which is to be returned to the lender is fixed to that of the principle and the interest percentage charged on it. The addition of too much debt adds risk to the company as it increases the future prospect of borrowing of money. It thus enhances the number of investors for the enterprise.
Debt and equity ratio
Debt to equity ratio is one of a major expression of company’s finance. A part of company’s fortune mainly depends on the investment. Investment depends on the confidence of investors in your business. High debt-equity ratio means money borrowed by your enterprise is greater than your business investment. Low debt-equity ratio mainly deals with increased investment in your company then borrowed money. If your investment is higher than borrowing, then it eventually attracts a number of investors.
Working on equity of stakeholder
If you want to reduce your entire balance sheet in emaciated form, you may end in bookkeeping equations. Stockholder’s liabilities and equity are more or less alike to the assets. Balance sheets of various corporations mainly comprise of shareholder’s equity. After the rearrangement of all the equations, you will find the liability amounts and the asset amounts as the main difference of stockholder’s equity. Proprietors of these corporations are known as shareholders because of the concept of sharing the stocks of the firm together. The equity of stockholder is similar to owner’s proprietorship. Your company will have either individual ownership certificates or certain stock certificates regarding the property of the firm.
More on bonds payment
Bonds are long term debts which are issued by the corporation and procured by an investor for cash. Corporation issues a warrant for the purpose of borrowing money from investors. Investors then become the holder and lender of bonds. These bonds are formal contracts which grant the corporations for the payment of the bondholders. The interest of bonds is for six months which depends heavily on the shared bonds’ interest rate. The maturity date is another important aspect of these relationships. Common stocks are comparatively higher in cost; bonds are of lower cost. Moreover, bonds never weaken the current ownership interest of the existing stockholders. For further information regarding debt and equity visit here.