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Debt and Equity Financing? |
What are the advantages and disadvantages of forgoing debt financing and equity financing? The only time debt financing makes sense is if you have a mature business that has a proven ability to return more than you are paying in debt. All other business situations are best financed with equity because if you are just getting started you can ask investors to buy equity and if they want to invest, that suggests you have a valid idea. Or if you are expanding in a new business with no proven cash flow, you should use equity for the same reason. The disadavantage of debt financing is outside of a Bank approving your loan, there is no one testing the value of your idea. And you are legally obligated to pay back debt if your business fails; with equity you have no obligation to pay back investors. |
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