Business Financing and the Capital Structure Essay - 3

Business Financing and the Capital Structure - Essay Example The debt financing is welcome in many cases in which the loaned amount can be easily repaid back by the borrower. In addition to this debt also provides advantage to the companies that have opted for debt. Mostly the companies in the later stages go in for debt financing. The Equity financing method is the process in which the companies use the method of raising capital by selling company stocks to the investors. While in debt, financing the company does not have to share any ownership with the creditors but in the equity financing the shareholders are given the ownership of the shares of the company. The equity shares capital is usually opted for in the initial starting of the company when there are no cash inflows or revenues. The company to entice the investors who have an appetite for risks alongside the entrepreneur who has started the business uses equity financing. In today’s business ground where the debt is costly because the ability to repay debt is highly essential, the companies should maintain a debt to equity ratio of 1:1 or 1:2. The 1:1 ratio of debt to equity means that debt and equity should be of the same amount where as the 1:2 ratio suggests that the same amount to debt should have double amount of equity. Thus, the decision of choosing debt financing or equity financing should be based on the stage of progress of the business. If the business is in the startup stage when the cash inflows and the revenues are scarce, the company should definitely go for generation of fresh equity capital. Where as in the later stages of the company when it has started acquiring cash inflows it should opt for debt financing. There is another problem involved in the starting up position of the company where if the company does not show a strong profit creating potential then it would not attract any strong investors or venture capitalists who