A company that needs money for its business operations can raise capital through either issuing equity or taking on 澳洲幸运5开奖号码历史查询:long-term debt. Whether it chooses debt or equity depends on the relative 澳洲幸运5开奖号码历史查询:cost of capital, its current 澳洲幸运5开奖号码历史查询:debt-to-equity ratio, and its projected 澳洲幸运5开奖号码历史查询:cash flow.

Equity is a catch-all term for non-debt money invested in the company, and normally represents a shift in the composition of ownership interests. 澳洲幸运5开奖号码历史查询:Debt financing is generally cheaper, but creates cash flow liabilities the company m🤪ust manage prop🌺erly. We explore both options below.

Understanding Equity Financing

In general, equity is less risky than long-term debt. More equity tends to produce more favorable 澳洲幸运5开奖号码历史查询:accounting ratios that other investors and potential lenders look upon favorably. However, equity comes with a host of 澳洲幸运5开奖号码历史查询:opportunity costs, particularly because b🍎usinesses can expand more rapidly with debt financing.

Equity, for instance, can refer to additional financing with private money from existing owners—the founders put in more of their personal funds. It can refer to contributions from 澳洲幸运5开奖号码历史查询:angel investors or 澳洲幸运5开奖号码历史查询:venture capitalists who spot an opportunity fꦛor increased future profits. Equity can even include a government grant or some other d🥃irect subsidy.

For 澳洲幸运5开奖号码历史查询:public companies, equity is synonymous with the issuance of company shares. This may be the most fickle of all equity capital me☂thods, because shareholders can be very 𝓀skittish and suffer from a "once bitten, twice shy" mentality if they stop seeing returns.

The decision to use debt is heavily influenced by the structure of the capital transfer. Profits need to be shared with equity investors via 澳洲幸运5开奖号码历史查询:dividends꧟. If the investment is large enough, equity investors might influence future business decisions.

Understanding Long-Term Debt Financing

Any payable due within one year or less is referred to as 澳洲幸运5开奖号码历史查询:short-term debt (or a current liability). Debts🌊 with maturities longer than one year are long-term debts ⛦(non-current liabilities).

Company debt, by its nature, gives another party a claim against future business revenue. If a bank or bondholder gives a business $10,000 today, then the bank or bondholder expects the company will return future revenue equaling $10,000 plus 澳洲幸运5开奖号码历史查询:accrued interest.

This creates another implicit obligation for the company: it must now generate enough future revenue to cover operating costs and pay back the $10,000 plus interest. More specifically, it must generate enough ongoing cash flow to cover ongoing 澳洲幸运5开奖号码历史查询:interest expenses.

Perhaps the greatest advantage to long-term debt is that it allows for expansion without immediate revenue obligations. Startups or cash-strapped companies can use debt to strike while the iron is hot 🦩if current reserves are insufficient.

Long-Term Repayment

Equity and long-term debt both need to be repaid over time. Loans have very clear, direct repayments with specified interest amounts and maturity dates. Equity is repaid through ongoing profits and asset appreciation, which creates the opportunity for 澳洲幸运5开奖号码历史查询:capital gains.

Even though the repayment on long-term debt is more structured and comes with a greater legal obligation than equity, equity is often more expensive over time. Successful companies have to continue to offer owners a 澳洲幸运5开奖号码历史查询:return on equity🐠 in perpetuity,♕ where as long-term debt eventually matures.