Describe Debt Vs Equity Financing.

Financing a business through borrowing is cheaper than using equity. This is because :

• Lender require a lower rate of return than ordinary shareholders. Debt financing securities present a lower risk than shares for the finance providers because they have prior claims on annual income and liquidation.
• A profitable business effectively pays less for debt capital than equity for another reason: the debt interest can be offset against pre-tex profits before the calculation of the corporate tax, thus reducing the tax paid.
• Issuing and transaction costs associated with raising and servicing debt are generally less than for ordinary shares.