Equity vs debt financing

Equity financing is acquired by conveying ownership interest (stock) in a company for capital from investors. Debt financing is acquired most often from a bank, which typically requires the company to pledge its assets as collateral.

The advantages of debt financing is that ownership isn't diluted. Also, the typical lender does not get involved in management decisions, and once the debt is paid back, the company has no further connection to the lender. The disadvantage is that the debt service elements of interest plus principal amortization has a negative impact on operating cash flow, typically from the first month.

Equity financing has the negative issues of ownership dilution, investors involvement in management decisions, and the potential for a conflict over the exit strategy. The advantage is that, since investors are motivated by a future exit event rather than incremental returns, the company's operating cash flow is left to be reinvested to grow the company.

Remember, a loan is a contract relationship that ends with repayment. Equity financing begins a process that is essentially a marriage with one class of investors that only ends when subsequent investors take them out.