Equity vs Debt Offering: What’s the Difference?

Companies often raise capital through offerings. When a company needs money to further grow its operations, it may look towards an offering. There are several types of offerings, however, including equity and debt. While they can both be used to raise capital, they aren’t the same. Equity and debt offerings work in different ways. What’s the difference between an equity and debt offering exactly?

Equity vs Debt Offering: What’s the Difference?

What Is an Equity Offering?

The most common type of securities-related offering, an equity offering involves a company selling stock units — or membership interest for limited liability companies (LLCs) — to investors.

Investors are often eager to buy stock units in companies because it earns them voting rights. At the same time, ownership of stock units can allow investors to make money from dividends. Dividends are payments made from a company to its shareholders in the form of free stock units. Most companies distribute dividends quarterly.

With an equity offering, companies can raise capital by selling ownership to an investor. Stock units are ownership. They can give investors voting rights as well as dividend payments

What Is a Debt Offering?

A debt offering, on the other hand, involves a company offering to borrow money from investors under the agreement that it will pay back the borrowed money, typically with interest. The company essentially sells a debt security to an investor. The investor won’t earn stock units or dividends from the sale. He or she will, however, earn money from interest payments.

Common examples of debt offerings include the sale of bonds and promissory notes. A bond is similar to a loan — only it occurs between a company and an investor. When selling a bond, an investor agrees to pay the company a specified amount of money for a given period of time. Conversely, the company agrees to pay back the investor with interest.

A promissory note is another type of debt offering. They typically have higher interest rates than bonds, making them attractive for investors. Bonds are long-term securities, whereas promissory notes are short-term securities. With their shorter duration, bonds carry risk more for investors, but the upside is that they tend to have higher rates. As a result, investors can make more money when buying promissory notes over bonds.

In Conclusion

An offering is an instrument used by companies to raise capital. Equity offerings involve the sale of stock units, whereas debt offerings involve the sale of bonds and promissory notes.

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