The question of equity vs. sub-debt financing has become very important in the modern day financial context as a lot of companies are in need of generating money that allows them to execute a wide variety of financial activities like initiation, expansion and acquisition for example.
On Equity Vs. Sub-Debt Financing
The question of equity vs. sub-debt financing has been an important one for the business establishments for a considerable period of time now.
Since it is necessary to have a continuous stream of finances coming in the company for various purposes these financial options have become pretty important.
Differences of Equity and Sub-Debt Financing
The differences of equity and sub-debt financing may be enumerated as below:
|Equity financing||Sub-debt financing|
|The owners may have significantly lesser control over their operations.||The loss of ownership is comparatively lesser.|
|The process is highly expensive.||It is comparatively less costlier.|
|The cost of capital is the highest.||The costs of capital are lower.|
|The invested capital remains in the company for a really long period of time.||It has to be repaid.|
|The dividends may be subjected to tax.||The interest paid cannot be taxed.|
|The evaluation of the company is a significant factor for receiving equity financing.||The company has to provide a collateral as well as personal guarantees at times.|
|Investors might want to be a member of the board of directors and have more say in the operations.||Lenders are likely to put financial disciplines and controls in place.
However, there are no management advisors.
Thus, it is evident that the business enterprises need to be aware of the various implications of these two sources of financing and make a decision after carefully reviewing their own needs as well as strengths and weaknesses.