Understanding Debt Equity Finance
Now let’s have a look in to the world of debt equity finance. Basically debt equity finance is the cash that proprietor or the business partners put into the business from their own pockets. As a return for the money that has been put into the business they get a share I the ownership of the company. Not only this ends here, but the profits arising from business after the payouts on interest and profit after taxes. All these profits after deductions are accessible to the equity owner. The invested money remains in the company and the owners thus get their invested money only after selling the shares of the company to someone else.
The biggest plus point in equity finance is that this is a low risk financing model. In the point of view of the owner of the company, the investor has nobody to repay the interest and the principle. By avoiding the option of debt capital, a business owner can always avert the causality of insolvency in case of being unable to repay the debts and also getting into the problem needing to guarantee or sell possessions to the amount providers. A businessman is capable of running a comparatively lower risk enterprise through the option of debt equity finance.
However the negative face of equity finance option is that the business will jog along quite slowly and will not make headway as much as it could. This may not be 100% possible with equity finance as compared to Debt finance. Suppose, a business project of huge potential has come across, the option of equity capital may not be apt for the situation. And if you recommend ignoring the alternative of debt finance, you could stand to lose.
In a nutshell this is equity finance. In reality it is impossible to run a business that is 100% absolutely debt free. So taking debt finance or equity finance is not such a bad idea. A successful business will also have a healthy equity to debt ratio. This ratio is used by analyst to check the health of your business, for assigning it credit rating and while subscribing the stock to customers. Both the forms of equity finance options have their advantages and disadvantages. It is better to have a good balance of the two.