Which is a Better way to Fund a Company, Debt or Equity?

Most entrepreneurs would rather take debt over equity in order to maintain the percentage of the shares that they own and to preserve their control over the company.  Debt also is advantageous because a company can reduce its tax burden : interest payments are tax deductible, whereas dividend payouts are not.

However, some companies, especially those with low profits or no significant assets to serve as collateral, find it hard to borrow money without obtaining personal guarantees from key investors or managers. Also, taking on too much debt can make a company more likely to default, which can lead to a costly bankruptcy process.

Ultimately, the choice of debt versus equity depends on a number of factors that vary from case to case, including whether the company can take on the obligation of regular interest payments, whether control of the company is an issue, and whether the company is in a position to negotiate better terms from the bank or from investors.

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