Debt Financing vs. Equity Financing - Assignment Example

The choice of how to run your business is your own; the lender has no say in it. Acme, being an MNE, has shareholders and the major shareholder might not want to lose control of the company. Debt financing helps in that. The impact of bank interest is also on tax deductions, if the bank is charging you 10 percent for your loan, and the government taxes you at 30 percent, then there is an advantage to taking a loan you can deduct. Take 10 percent and multiply it by (1-tax rate), in this case, it's 10 percent times (1-30 percent), which equals 7 percent.

After your tax deductions, you'll be paying the equivalent of a 7 percent interest rate. (Richards, n.d.) Interest rates keep fluctuating; as Acme is investing in another country the bank may charge a higher interest rate. Also nowadays, banks have started a new thing, they don't fix the interest rate thus if conditions change and the interest rates change the banks will also charge a higher interest rate. The more you borrow, the more unstable your company may look. In other words, it affects the company's credit rating.

The higher your credit rating, the riskier your business looks to the lender. This way it becomes difficult to get loans when you really need them. The funds received through equity financing do not have to be paid back. The money is spent on expanding the business. Also, the investors who buy shares are more interested in profitability rather than security while banks consider the security aspect the most.The cash flow generated from the business operations can be used for the business rather than paying back the lenders.

The investors are interested in business operations and can help the company functioning properly and by giving advice. Also, they are willing to make further investments just so that the company remains profitable.The disadvantages of equity financing are:Raising equity financing is costly and time-consuming. Background information is required and the time it takes to roll out the share into the market and the investors to buy is plenty. The shareholder will have bought a share of your business and will have a say in its operations.

Your share in the company will then be diluted.