How to Choose Between Debt and Equity Financing

Ultimately, the decision between debt and equity financing depends on the type of business you have and whether the advantages outweigh the risks agen slot online. Do some research on the norms in your industry and what your competitors are doing. Investigate several financial products to see what suits your needs. If you are considering selling equity, do so in a manner that is legal and allows you to retain control over your company.

Many companies use a mix of both types of financing, in which case you can use a formula called the weighted average cost of capital, or WACC, to compare capital structures. The WACC multiplies the percentage costs of debt and equity under a given proposed financing plan by the weight equal to the proportion of total capital represented by each capital type.

Key takeaway: One way to determine which financing route is best for your business is to use the WACC formula, which allows you to compare capital structures. The benefits of equity financing are that it allows for quick scaling and doesn’t hurt your cash flow, because you don’t have to repay the debt until the company becomes profitable. Potential downsides are that it’s hard to obtain and the investors get a say in how the company is run.