In the accounting industry, financing remains an important concept, as many organizations are reliant on them for financial stability and longevity. Although there are a plethora of financing options and types to choose from, the focus of the work will revolve around debt and equity financing. These two commonly used forms of financing are important as they are both unique in how they are utilized. The author of this piece will address these two financing options while providing examples of each and addressing which capital structure is most advantageous.
Debt financing is the process of borrowing money from a lender such as a bank. These financings option comes in the forms of loans both secure and unsecured.
"Security involves a form of collateral as an assurance the loan will be repaid. If the debtor defaults on the loan, that collateral is forfeited to satisfy payment of the debt" (Entrepreneur, 2014, p. 1). In most cases a lender will ask for some time of security on a loan and least often times will lend based on name recognition or status. One of the most common sources of debt financing is seen within startup businesses where debt financing is often provided by friends and family instead of commercial lending institutions.
"When borrowing money from relatives or friends, have your attorney draw up legal papers dictating the terms of the loan, as formalized documentation" (Entrepreneur, 2014, p.1). Another form of debt financing that is most common occurs with credit cards through a credit line. Credit cards are used to provide a way to businesses to get several thousands of...