1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Leya [2.2K]
2 years ago
5

Why is 'time' a sensitive factor to consider when deciding whether to choose debt or quity financing?

Business
1 answer:
anzhelika [568]2 years ago
8 0
If you are hoping to start a new business, the first thing you will need to figure out is where you will get your financing from. Without a reliable source of financing at your disposal, it will not matter if your idea for a new business is the greatest in the world—you won’t even be able to turn your lights on.
Once you have secured financing, you will be able to focus on the more creative components of your business and move closer to turning your dreams into a reality. However, before you go applying for financing everywhere it happens to be available, ask yourself, “what kind of financing is best for my business?”
Generally speaking, all business financing options fall into one of two categories. With debt financing, your business borrows from a lender and plans to pay that amount back (plus interest) over time. With equity financing, on the other hand, you are selling partial ownership of your business. While this type of financing does not need to be “paid back” in the future, you do lose some control of your business and you may also lose a portion of your profits.
Both debt and equity financing have pros and cons for all new business owners. The choice that is right for you will be very specific to your business. In this article, we will briefly discuss seven factors to consider when choosing between debt and equity financing options.

1. Long-Term Goals
As the owner of your new business, it will be critical for you to think about what you actually hope to achieve in the long-run. What is the purpose of starting your business? Where do you hope for your business to be in ten years? Twenty years? By answering these questions, it will be easier for you to decide how financially entrenched in your business you will actually be. Though you don’t need to come up with a future “exit strategy” this very minute, it is certainly a good thing to think about.

2. Available Interest Rates
Naturally, the opportunity cost of choosing equity over debt finance will be largely determined by how much you will actually need to pay to borrow money. If your business has access to low-interest rates or specialty loans (such as an SBA loan), the total cost of borrowing will be relatively lower. In order to make sure you are getting competitive quotes from potential lenders, it will be a good idea to compare multiple options before making any final decisions. Working to improve your business’ current credit score can also make a major difference.

3. The Need for Control
By surrendering partial ownership of your business you are, to a certain extent, giving up control. In order to make sure they can still outvote all other stakeholders, many business owners will maintain 51 percent ownership of the business while selling the remaining 49 percent. If having total or significant control of your business is something that’s important to you, be sure to limit the amount of equity you end up distributing.

4. Borrowing Requirements
There are many different things lenders will look at when deciding whether to issue a loan. In addition to a general financial background check, lenders will also want to see some hard numbers on paper. The factors they may look at include things such as your debt-to-equity ratios, your fixed monthly expenses, your overall business plan, and various others. These requirements can often be rather rigid, which is why your business needs to plan its financing strategy in advance.

5. Current Business Structure
Another variable that will impact the opportunity cost of borrowing (or issuing equity) is your business structure. If your business is already formally structured as a partnership, for example, this may complicate the process of selling equity. Additionally, if you hope to secure your equity finance via public means—such as selling stocks on the open market—you will need to formally declare your business to be a public corporation. Though your business structure is something that can (and likely should) be changed in the future, there is no doubt that the preexisting structure will have a major impact on your short-term financing decisions.

6. Future Repayment Terms
While many business loans are simple, flat loans with a fixed interest rate, there are many loans with repayment terms that are notably more complicated. For example, some loans will not require any repayment for several years down the loan. When this is the case, you will need to calculate both the average total interest rate as well as the time value of money. If you are hoping to borrow from a single venture capitalist or angel investor, they may be able to dictate additional terms that are not found in traditional bank loans. Sometimes, these investors will offer a complex mix of debt and equity financing for new businesses.

You might be interested in
Jennie receives $12,000 (of which $2,000 is earnings) from a Qualified Tuition Program. She uses the funds to pay for new furnit
Dafna1 [17]

Answer: $2000

Explanation:

From the question, we are informed that Jennie receives $12,000 (of which $2,000 is earnings) from a Qualified Tuition Program and she uses the funds to pay for new furniture for her apartment.

The amount that is taxable to Jennie will be the amount of earnings she made who is $2000.

8 0
2 years ago
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is ​$1.64 per​ kilogr
Talja [164]
This is a cool question
3 0
3 years ago
The required rate of return is the minimum rate of return that an investment project must yield to be acceptable. question 15 op
Digiron [165]
A.true
The required rate of return is the minimum rate of return that an investment project must yield to be acceptable
6 0
3 years ago
Heavy engineering businesses encourage employees to use safety equipment. Which type of controllable risk are they trying to avo
svet-max [94.6K]

Answer:

1 Needless and preventable machine injuries related

Explanation:

Heavy engineering businesses encourage employees to use safety equipment. Which type of controllable risk are they trying to avoid? Heavy engineering businesses encourage their employees to use safety equipment, such as gloves and protective clothing, to avoid risks.

1 Needless and preventable machine injuries related

8 0
3 years ago
Jeff, a 52% owner of an S corporation, has a stock basis of zero at the beginning of the year. Jeff's basis in a $10,000 loan ma
Rzqust [24]

Answer:

See below

Explanation:

In order to restore any reduction in loan basis, only the net increase is applied in line with section 1367(b)(Adjustment to basis of stocks of shareholders).

What this means is that there is no net increase regarding the information given above I.e ($11,000 - $15,000).

We can safely conclude that there is $11,000 tax free income since the stock basis has been increased by $11,000. There is also a $4,000 capital gain.

3 0
2 years ago
Other questions:
  • A bill in the House of Representatives may only be introduced by a(n) __________. employee of a federal agency lobbyist for a sp
    6·2 answers
  • In which of the following ways can a person earn an income? A. Investment B. Salary C. Savings D. Wage
    15·2 answers
  • The largest country in the eu, in terms of population,
    15·1 answer
  • Vertical integration strategies offer good potential
    12·1 answer
  • You are planning to deposit $2,000 into an account at the end of year 1 and $3,000 at the end of year 2. If the account earns 4%
    6·1 answer
  • Artur, who has a disability, is an employee of banquet & event facilities & services, inc. after the installation of new
    8·2 answers
  • Unipeg Corporation has uniform high sales targets for its employees all across the globe, regardless of the environmental constr
    6·1 answer
  • Amanda Winter worked as a public engagement coordinator at Safe Food Alliance until three months ago when her manager, Laura Mor
    11·1 answer
  • Use the drop-down menus to indicate whether each of the following events would be recorded as revenues or expenses at the time i
    7·1 answer
  • The jackson family is undecided about whether or nara buy a new car of the
    12·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!