Small-Business Financing: Debt vs. Equity

Summary

• Since debt and equity are accounted for differently, each has a different impact on earnings, cash flow and taxes, and each also has a different effect on leverage, dilution and a host of other metrics.
  
• Debt can be a loan, line of credit, bond or even an IOU -- any promise to repay borrowed amounts over a certain time with a specified interest rate and other terms.
  
• When you finance with equity, you are giving up a portion of your ownership interest in -- and control of -- the company in exchange for cash.
  
• While equity financing can be used for many different purposes, it is usually used for long-term general funding and not tied to specific projects or time frames.
  
• The mix of debt and equity that best suits your company will depend on the type of business, its age, and a number of other factors.

DEBT-TO-CAPITAL RATIOS FOR SELECTED INDUSTRIES
Publishing 34%
Homebuilding 37%
Advertising & Marketing 37%
Lodging & Gaming 56%
General Retailing 24%
Supermarkets & Drugstores 33%
Commercial Transportation 18%
Packaged Foods 27%
Restaurants 23%
Health Care: Managed Care 20%
Movies & Home Entertainment 17%
(Source: Standard & Poor's.)

Source:
http://finance.yahoo.com/how-to-guide/career-work/12825
Topics
Small-Business Financing: Debt vs. Equity
Debt
Equity
Striking a Balance

Additional comments:

Yahoo! Finance User - Wednesday, May 28, 2008, 11:37AM ET Report Abuse
Overall: 4/5
Nice overall article. Loan terms depend on what is being pruchased. Real estate (10 to 20 yrs), equipment (3 to 7 yrs), inventory (2 to 3 yrs), etc. An SBA backed loan can help lengthen these terms which will help decrease monthly payments.