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 costly |
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 taxes |
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.
