The main business objectives are to get profit and increase their investor’s wealth. To achieve these goals, Finance acts like blood for any organization to continue their business operations efficiently. Financial can be provided through two main sources
– Equity
– Debt
These two fields are distinguished below separately
Equity: Generally, the term equity is related to ordinary shares. Equity finance is an investment in the organization by organizational shareholders, represented by ordinary share capital reserves plus. There are also other parts of stock capital such as “preference shares” but it is not treated as equity because their characteristics are related to debt finance. Equity finance can be raised through three main sources. The first source is that the funds produced internally also referred to as retained earnings. This is an income that is maintained in business (profits that cannot be distributed to ordinary shareholders). The main advantage of increasing financial through retained earnings is that, it is cheap and does not require transaction costs. The second main source of equity finance is the right problem. The right problem is only an offer to the existing shareholders to subscribe to new shares with discounts to the current market price. The main advantage for the truth is rarely failed and it was cheaper than public share problems. The third main source of increasing equity finance is to issue new shares to the public. A large number of finance can be produced through new stock problems but on the other hand, it is far more expensive than other sources of equity because it requires severe transaction costs and some other professional costs.
Debt: Financial debt, usually in debt forms, bonds or other loans used as financial resources as an alternative equity. Debt can be in various forms such as bank loans, loan records and debt that can be exchanged or cannot be spread. There are many advantages of debt finances. Like, the form of an investor’s viewpoint, the debt is low at risk. And from the point of view of the organization, cheap debt, does not disburse control and has a predictable cash flow. On the other hand, debt finances also have several losses such as investor debt viewpoints do not have voting rights and form an organization’s point of view, debt is not flexible and increases risk at a high crisp level.
The main difference between financial equity and debt financing:
The main difference between equity and debt is that, debt is treated as a cheap financial source because it is less risky than equity. Repayment of debt requires priority for all other equity investments. On the other hand from coin equity finance considered is a risky and expensive financial source because for some large investments, the funds produced internally are not enough. And issuing new shares requires additional fees (mentioned above). In short there is a strong need for any organization to maintain a balance between the two major financial resources to carry out and support their business efficiently.