Business Financing and the Capital Structure Essay - 3

Business Financing and the Capital Structure - Essay ExampleThe debt financing is welcome in many cases in which the loaned gist can be easily repaid back by the borrower. In addition to this debt also provides advantage to the companies that have opted for debt. Mostly the companies in the later stages go in for debt financing. The Equity financing method is the process in which the companies use the method of raising capital by selling company stocks to the investors. While in debt, financing the company does not have to share any ownership with the creditors but in the uprightness financing the shareholders are given the ownership of the shares of the company. The equity shares capital is usually opted for in the initial starting of the company when there are no cash inflows or revenues. The company to entice the investors who have an proclivity for risks alongside the entrepreneur who has started the business uses equity financing. In todays business ground where the debt is c ostly because the ability to repay debt is highly essential, the companies should maintain a debt to equity ratio of 11 or 12. The 11 ratio of debt to equity means that debt and equity should be of the same amount where as the 12 ratio suggests that the same amount to debt should have double amount of equity. Thus, the decision of choosing debt financing or equity financing should be based on the stage of progress of the business. If the business is in the startup stage when the cash inflows and the revenues are scarce, the company should definitely go for generation of new-made equity capital. Where as in the later stages of the company when it has started acquiring cash inflows it should opt for debt financing. There is another problem involved in the starting up position of the company where if the company does not show a strong profit creating potential then it would not attract any strong investors or venture capitalists who