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debt capital vs equity capital

Debt Capital vs Equity Capital

Capital – when used in the context of running a business, it refers to the money a business needs in order to provide goods and services to its customers. Whether it’s a retail store, restaurant, professional photography, manufacturing, etc., all businesses need capital to operate. Granted, capital requirements vary from business to business depending on many factors, but the fact is that all businesses need it to stay afloat.

But there are two primary types of capital: debt and equity. While both of these types of capital provide businesses with much needed funding, there are stark differences between the two. To learn more about debt capital vs equity capital and which one is right for your business, continue reading.

Debt Capital vs Equity Capital

Debt Capital

Capital generated by borrowing it from a bank or financial institution is known as Debt capital. It’s called “debt capital” because the business owner takes on debt in exchange for the provided funds. Traditional bank loans, for instance, are considered debt capital. The business owner receives funding for his or her business under the agreement that the load will be repaid back, usually with interest.

Many business owners prefer debt capital over equity capital, simply because it doesn’t force them to forfeit ownership of their business (see below). The downside, however, is that debt capital can be more difficult to acquire than its equity counterpart. If your business is still relatively new and doesn’t have a proven track record of success, banks may be reluctant to lend you money.

Equity Capital

Equity capital differs in the sense that it does not require the business owner to take on debt. Instead, investors buy partial ownership (equity) in the business, without requiring the business owner to repay the funds.

There are certain advantages to choosing equity capital over debt capital, one of which is its ease of acquisition. Startup businesses often struggle to obtain traditional debt capital, so they look to equity capital as an alternative. If they can successfully pitch an idea to an investor, the investor may be willing to provide capital in exchange for equity.

The downside to funding your business with equity capital is that you’ll have to forfeit partial ownership of your business. On the other hand, not having to repay equity capital (in most cases), is another benefit of this funding option.

This article was brought to you by Intrepid Private Capital Group – A Global Financial Services Company. For more information on startup and business funding, please visit our website.

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Intrepid Private Capital Group • July 19, 2017

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