Bank Loans: Fixed amounts borrowed for a specific period with a set interest rate. They provide certainty for budgeting but often require collateral (security) and regular interest payments regardless of profit levels.
Debentures (Bonds): Long-term loans issued by a company to the public or institutions. The company pays a fixed rate of interest (coupon) and must repay the principal at a future maturity date.
Leasing and Hire Purchase: Methods to acquire assets without full upfront payment. In Leasing, the business pays for use but never owns the asset; in Hire Purchase, ownership transfers after the final installment.
Share Capital: Raising funds by selling ownership stakes in the company. Unlike debt, there is no obligation to repay the capital or pay fixed interest; however, profits are shared via dividends.
Venture Capital: Professional investors provide large sums of capital to high-growth startups in exchange for equity. They often provide expertise but demand significant control and high returns.
Business Angels: Wealthy individuals who invest their own money in early-stage businesses. They are usually more willing to take risks than banks but seek a share of ownership.
| Feature | Debt Finance | Equity Finance |
|---|---|---|
| Repayment | Mandatory at set dates | No mandatory repayment |
| Cost | Fixed interest (tax-deductible) | Dividends (not tax-deductible) |
| Control | No loss of control | Dilution of ownership/voting |
| Risk | High (insolvency if unpaid) | Low (no legal obligation to pay) |
| Security | Often requires collateral | No collateral required |
The Matching Principle: Always check if the source matches the asset. Using an overdraft (short-term) to buy a factory (long-term) is a common error that leads to liquidity crises.
Cost-Benefit Analysis: When evaluating sources, consider the Effective Interest Rate versus the expected Return on Investment (ROI). Finance is only viable if .
Control vs. Capital: In exam scenarios involving family businesses, equity is often less desirable because it dilutes control, even if it is 'cheaper' in terms of cash flow.
Check for Security: If a business has no fixed assets (like a software firm), bank loans may be difficult to obtain, making equity or venture capital more likely solutions.
