Equity Financing vs. Debt Financing
                     Equity 
Financing 
vs. Debt 
Financing
What is debt 
financing?
Debt means borrowing money, and debt financing 
mean borrowing money without giving away your 
ownership rights. Debts finance means having to pay 
both the interest and the principal at a certain date; 
however, with strict conditions and agreements for 
the reason that if debt conditions are not met or are 
failed, then there are severe consequences to face.
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Types of debt financing
1. Traditional bank loans. While often difficult to 
obtain, these loans generally have more favorable 
interest rates than loans from alternative lenders.
2. SBA loans. The federal Small Business 
Administration is a popular choice for business 
owners. 
3. Merchant cash advances. This form of debt 
financing is a loan from an alternative lender that 
is repaid from a portion of your credit and debit 
card sales. 
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Pros of debt financing
1. Clear and finite terms: With debt financing, 
you’ll know exactly what you owe, when you owe it 
and how long you have to repay your loan. 
2. No lender involvement in company 
operations: Even though debt financers will 
become intimately familiar with your business 
operations during your approval process, they’ll 
have no control over your day-to-day operations.
3. Tax-deductible interest payments: When it 
comes time to pay taxes, you can deduct debt 
financing interest payments from your taxable 
income to save money.
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Cons of debt financing
1. Repayment and interest fees: These costs can 
be steep.
2. Quick start of repayments: You’ll typically begin 
making payments the first month after the loan 
has been funded, which can be challenging for a 
startup because the business doesn’t have firm 
financial footing yet.
3. Potential for personal financial losses: Debt 
financing comes with the potential for personal 
financial loss if it becomes impossible for your 
business to repay the loan.
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What is equity 
financing?
Equity financing means selling a stake in your 
company to investors who hope to share in the future 
profits of your business. There are several ways to 
obtain equity financing, such as through a deal with a 
venture capitalist or equity crowdfunding.
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Types of equity 
financing
1. Angel investors: An angel investor is a wealthy 
individual who gives a business a large cash 
infusion. 
2. Venture capitalists: A venture capitalist is an 
entity, whether a group or an individual, that 
invests money into companies, usually high-risk 
startups. 
3. Equity crowdfunding: Equity crowdfunding is 
when you sell small shares of the company to 
numerous investors via crowdfunding platforms.
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Pros of equity 
financing
1. Well suited for startups in high-growth 
industries: Especially in the case of venture 
capitalists, a business that’s primed for rapid 
growth is an ideal candidate for equity financing.
2. Rapid scaling: With the amount of capital a 
company can obtain through equity financing, 
rapid upscaling is far easier to achieve.
3. No repayment until the company is 
profitable: Whereas debt financing requires 
repayment no matter your business situation, 
angel investors and venture capitalists wait until 
you make a profit before recouping their 
investment. 
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Cons of equity 
financing
1. Hard to obtain: Unlike debt financing, equity 
financing is hard to obtain for most businesses. It 
requires a strong personal network, an attractive 
business plan and the foundation to back it all up.
2. Investor involvement in company operations: 
Since your equity financers invest their own 
money into your company, they get a seat at your 
table for all operations.
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How to choose 
between debt and 
equity financing?
The decision between debt and equity financing 
depends on the type of business you have and 
whether the advantages outweigh the risks. 
Investigate several financial products to see what 
suits your needs. If you are considering selling equity, 
do so in a manner that is legal and allows you to 
retain control over your company.
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