Debt vs Equity Financing | Advantages & Disadvantages | Key Differences

hello everyone hi welcome to the channelof WallStreetmojo watch the video till the end also if you are new to thischannel then you can subscribe us by clicking the bell icon friends today weare going to learn a concept which is known as debt versus equity financing weare going to understand advantages and disadvantages of both of them and basedon that we'll be able to figure out you know said respective choices one can gofor equity or debt now over here we are going to look at chart and this chart isgoing to show you the PEP that is a debt to equity ratio over here so now as youcan see this is basically Pepsi's a debt to equity ratio is 2.

79to close that is in the recent year but you know it was around 0.

5 X in 2009 and2010 you can see over here it was 0.

5 X close to that has jumped and you noticeit has taken a rise over here so it was it at 0.

5 standing here however itstarted rising rapidly to 2.

792 closely around in 2014 orbasically in the current so what does this mean for Pepsi you know how did howdid its debt equity ratio increase dramatically from 0.

5 to directly to 2.

792 to see what is the key difference between the debt versusequity financing how does it affect the financial strength of the company welllet's discuss the financing your business and what is right and why it isright that debt vs equity so in this tutorial we are going to discuss the samenow first you need to understand at a very initial and that what exactly isthe debt financing right C that means you when you borrow any amount and thedebt financing means borrowing money without giving away your ownership thisis very important ownership rights so debt finance means you know having topay both your interest as well as your principal and however with some strictconditions and agreement for the reason that if the debt conditions are not metthen in that scenario you or you fail then theresevere consequences to fail so usually the the rate of interest and the matureor the payback date of their borrowing is fixed and pre discussed so thepayback of the principal can be done in full or in in part as agreed upon in theloan agreement and debt financing can be either loan it can be in the loan formor in the form of sale of bonds very important right however they do notchange the conditions of the borrowing the lender of the money can claim hismoney back as per his agreement so hence lending money to company is usually a asafe for you and you will definitely get your principal back along with yourgreat interest about the same so this was regarding the debt you know see debtfinancing can be both secured and unsecured financing security is usuallyit is a guarantee or assurance that the loan will be paid off and the securitycan be a type so whereas you know some lenders will lend you money on the basisof their idea or on the basis of your goodwill right or your brand andvariants that security can be offered to avoid a debt financed based on they knowsecurity or debt financed can be able or as a different type of unsecured loan aswell now here we understood what is debtfinancing let's understand equity financing over here now the companyneeds cash or additional cash to grow so this funds can be raised either by debtor equity financing now that you know about the debt financing you know I'llexplain you know the equity financing see unlike debt financing equityfinancing is basically a process of raising raising the funds by sellingyour stocks in the market selling your stocks in the market and the theproportion of the ownership is given to the finance or depending upon the amountinvested in the company so finance is required for every business and in everystage of business beat your startup or or the growth of the company and so onand so forth so equity financing is another word for ownership and you canyou can see that you know ownership is really very important in when we talkabout this and usually companies like equity financing because of the investorpairs or the risk in the case of the businessfailure of the investor is also in a nose so however the loss of the equityis the loss of the ownership because equity gives you a say in the operationsof the company and mostly in the difficult times of the company besidesyou know just the ownership rights of the investor also get some claim for thefuture profit of the company now satisfaction of the equity ownershipcomes in the form of an example of some investors are happy with the ownershiprights and some are happy with the receipt of the dividends right whereasyou know some investors are happy with the appreciation of the share priceright now let's understand the advantages and disadvantages of debtfinancing first we are talk of going to talk about the advantages when you talkabout the advantages of the debt financing debt financing it does notgive the lender the ownership ownership and write of the company so your bank oryour lending institution you know you will not have a right of telling you howto run your company and hence you know that right will be all yours now onceyou pay back the money your business relationship with the lender ends so youjust basically need to pay back your money now the interest that you pay overhere on the loan is after the deduction of the taxes so it's always the interestis always post-tax now fourth point you can choose the duration of your of yourloan it can be the long term or short term and if you choose a fixed-rate planyou or you the amount of the principal and the interest will be known and henceyou can plan your business budget accordingly there are some disadvantageof the same we need to understand that also very well the first and theforemost is that you have to pay back the money in the specific amount of ourtime which is very important over here too much of loan you know what debtscreates a cash flow problems which creates a trouble in paying back yourdebts it's called basically the debt trap you know the third disadvantage isthat you know showing too much debt creates a problem for raising equitycapital as in deduct as debt is considered very high risk potentialby the investor this will limit your ability to raisecapital for your business can fall into really big crisis you know in case oftoo much of debt especially during the hard times when the sale of organization in this in the fall town and the cost of repaying the loans isquite high hence you can reduce the chances of the growth of the company nowif we talk about the equity you know equity has advantages like you know therisk is less and you actually collect the network of the investor whichincreases your prestige you can see that an investor basically does not expectimmediate returns from the investment and hence it takes a very long term ofview of your business fourth you know you will have to distribute your profitor and not pay off the loan payments so basically dividend will come intopicture over here and in case of the business fails the money need not berepaid but there are some disadvantages is that you know you can end up havingpaying up more returns to your then you may pay up in the bank loans you may ormay not be giving up the control of the company in terms of ownership of theshare with the profit and it is very important to take the consent or theconsult your investor before taking a big for your business and in case of youknow you know huge disagreement with the investor you might have only to take upyour cash benefits and let the investor run out of the business without you 5thyou know finding the right investor for your business it really takes time andefforts both so it is extremely important to strike the balance betweenthe dead and the equity ratio the company to make sure you know thecompany makes appropriate profit and too much of debt can be to bankruptcy whereas too much of equity this is Lehman brothers example whereas too much ofactivity can weaken the existing shareholders and this can really harmthe returns hence the key is the striking balancebetween the two in order to maintain the capital structure the companywell the idle ratio is 1:2 very quickly needs to be twice but youalways needs to be the twice of the debt of the operation and double the quantityof the equity is an assurance that they company can easily cover all the lossesborne by the company inflation like we all know it's extremelyimportant to keep and maintain the balance in everything the same goes withthe business and investments so maintain an appropriate balance between thefinancing your company can lead to you an appropriate profit so that's it forthis particular topic if you have learned and enjoyed watching this videoplease like and comment on this video and subscribe to our channel for thelatest updates thank you everyone Cheers.

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