Monday, June 21, 2021

WHY DEBT CAN BE PREFERRED OVER EQUITY?

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  • The decision-making power rests with the creator. Debt does not offer any claim to the corporation and, thus, the entrepreneur’s ownership is not diminished.
  • The lender does not have any claim on potential profits-only repayment of the principal sum at a fixed rate along with interest. The founders receive a greater portion of the rewards as the company expands exponentially.
  • A tax-deductible expense is interest on the mortgage, reducing the total cost of the loan to the company.
  • Debt funding is comparatively easier since the corporation is not expected to comply with separate legislation on securities.

WHY EQUITY CAN BE PREFERRED OVER DEBT?

  • Debt has a set maturity schedule and is due to whether or not the corporation makes money. The lenders can only take a fixed part in what gains or losses are generated by the enterprise. Equity requires no repayment.
  • Owing to a more strain on interest rates, it takes more time for the company to hit a break-even point. Heavy debt companies are rising slower because the bulk of the profits are used to repay the debt. Equity funding does not mandate that profits be distributed daily, but at the discretion of the investors.
  • The business must ensure that adequate cash flow is generated to repay the debt at a set period. The repayment of debt regularly exhausts a portion of the cash flow generated from the company. No influence on cash flows is involved in equity funding.
  • Debt is commonly provided for primary and collateral security, personal security, etc. The funding of equity does not require any protection or guarantee; it is based on the company’s perceived prospects.
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