- Define equity and debt financing, and discuss the advantages and disadvantages of each financing approach.
Let’s assume that taking your company public was a smart move: in posing questions like those that we’ve just listed, investors have decided that your business is a good buy. With the influx of investment capital, the little laundry business that you started in your dorm ten years ago has grown into a very large operation with laundries at more than seven hundred colleges all across the country, and you’re opening two or three laundries a week. But there’s still a huge untapped market out there, and you’ve just left a meeting with your board of directors at which it was decided that you’ll seek additional funding for further growth. Everyone agrees that you need about $8 million for the proposed expansion, yet there’s a difference of opinion among your board members on how to go about getting it. You have two options:
- Equity financing: raising the needed capital through the sale of stock
- Debt financing: raising the needed capital by selling bonds
Let’s review some of the basics underlying your options.