Equity Financing Equity financing takes the form of funding obtained from investors in exchange for an ownership stake in the business. Such funds may come from friends and family members of the business owner, corporate or strategic investors, or investment funds (such as venture capital or private equity). A primary advantage to equity financing is that the business is not obligated to repay the money. Instead, the investors hope to reclaim their investment out of future dividends or capital appreciation as their ownership stake increases in shareholder value. The involvement of high-profile investors may also help increase the credibility of a new business to third-parties, as a collateral benefit to a particular shareholder’s association with the company, which may result, among other things, in new business opportunities. A disadvantage of equity financing is the voice that an outside investor gains in business decisions of varying priority; as a result, as ownership interests become diluted, managers face a threatened loss of autonomy or control. Additionally, a detailed look at cost of capital may point to an excessive reliance on equity financing; since equity rates of return are expected to be higher than the cost of debt capital, a business may not be using its capital in the most efficient manner. Debt Financing Debt financing takes the form of loans that must be repaid overtime, usually with regular interest and principal payments. Debt offers businesses a tax advantage, because the interest paid on loans is generally tax deductible. Borrowing also limits the business’s future obligation related to additional cash flows, because the lender does not typically receive an ownership or profit share in the business. Although advantageous in various circumstances, debt financing also has its disadvantages. New businesses sometimes find it difficult to make regular loan payments when they have irregular cash flow. In this way, debt financing can leave businesses vulnerable to economic downturns or interest rate hikes. Carrying too much debt is also a problem because it increases the company’s perceived risk, making the business unattractive to investors and potentially limiting its ability to raise additional capital in the future.